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

Hello, everyone, and welcome to today's webinar. My name is Sonia Kim. I am the Global Head of Product with S&P Global Sustainable1. It's my pleasure to moderate today's webinar entitled Biodiversity in Business: Next Generation to Assess and Disclose on Nature-related Risks and Opportunities. Before I introduce my guests, a few housekeeping items. We recognize that the topic of today's webinar is of great interest to you. We want this to be an interactive session. And I encourage you to submit questions for discussion. At the bottom of your screen, you'll see a row of widget icons. These icons will allow you to interact with us throughout the session. I'd like to point out that the Q&A widget, which can be used to submit questions to the panelists, is on that icon widget bar as well, as well as the survey widget, which we will be asking you to fill out at the end of our session. Please take the time to fill out our short survey. We really value your insight and feedback. 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 available shortly after we conclude. If you encounter technical issues during the program, please try refreshing your browser. If the issue persists, let us know through the Q&A widget to contact us, and a member from our technical team will assist you. Now it is my pleasure to introduce today's panel, my colleagues from S&P Global Sustainable1. We have Gautier Desme, Head of Data Innovation; Divya Mankikar, Global Head of ESG Market Engagement; and Frederic Samama, Head of Strategic Development. And before we get into the meat of our discussion, I'd like to kick off with some stats and a brief intro to our Nature & Biodiversity product. 85% of the world's largest companies have a significant dependency on nature across their direct operations. That's 22 million hectares of land. That is the ecosystem footprint -- next slide, please. 22 million hectares of land, that's the ecosystem footprint tied to the revenues generated by the world's largest companies. And that's equivalent to the degradation of 2.2 hectares of the most pristine or intact ecosystems. And 46% of the largest companies have at least one asset located in a key biodiversity area that can be exposed to future reputational and regulatory risk. These statistics show us quite a dramatic link between nature and our global economies. New frameworks are being developed to recommend how we should be thinking about monitoring, evaluating and disclosing how companies' operations affect critical ecosystems. We're seeing that with the Global Biodiversity Framework recently adopted by the 15th COP on Biodiversity and now with the emerging TNFD, or Taskforce on Nature-related Financial Disclosures. That's why businesses and investors are sharpening their focus on this topic. Businesses need adaptation and resilience plans factored into their long-term strategies. Investors need tools to help evaluate the risks and opportunities across the assets, companies and/or portfolios that they own. You may know that S&P Global launched its first Nature & Biodiversity Risk product last week, built on the Nature Risk Profile methodology co-developed by S&P Global and the United Nations Environment Programme's World Conservation Monitoring Centre. It's a dataset covering 17,000 companies, underpinned by analysis on 1.6 million assets. This dataset provides a quantitative approach to assessing nature-related impacts and dependencies resulting from a company's direct operations. It's a dataset that will also help support businesses who are reporting in line with the TNFD. So once again, welcome. We're thrilled to have you join me and my fellow S&P Global Sustainable1 colleagues in this discussion about how we can use data to quantify nature-related risks, what insights can the data provide and how can -- how should we be thinking about integrating the information into investment analysis and decision-making. So let's start with Divya. Can you give us some more context on what we're hearing and seeing in the market and why nature and biodiversity risk have become such an emerging and broad concern?

Absolutely. Thank you so much, Sonia, and thank you for everyone who's joining the webinar or watching the replay. There are so many data points of why nature and biodiversity is important to the private sector. We have just handpicked a few here. But as I've been engaging the knowledge community, which is several hundred-strong, we've heard so many more. So one of the ones that is often quoted is from the World Economic Forum's risk report released earlier this year, which found that biodiversity loss and ecosystem collapse is the fourth most severe global risk to business over the next 10 years. So that really comes from research that translates this megatrend into why it has -- into the economic impact it has on the private sector. If we go to the next slide, that research from the World Economic Forum actually builds on the 2020 report, The Dasgupta Review, that came out from the U.K. government, which found that there has been, for sure, a significant increase in produced capital over the last few decades. But that has been linked to a significant decline in natural capital. And as you see these two lines diverging in this graph, one wonders how far can that divergence go before produced capital starts to be impaired as well. So these are some of the reasons why private sector companies across sectors, nonfinancial corporates, banks, insurers, have been coming to us to ask how they can think about nature and biodiversity risk in their portfolios, in their lending and translate that into the impact on their decision-making. If we can go to the next slide, please. Another reason why the private sector has really taken an interest in this area is the recent agreement agreed in December at COP15, the Biodiversity COP, where a number of different policy commitments that governments have put in place, for example, protecting and restoring land, putting it into conservation. And most importantly potentially to the private sector is the commitment to encouraging policy that causes business and finance to publicly disclose analysis of how they are dependent and impact nature. So this is really a comprehensive set of indicators, both in the financial sphere and also the work of national governments over the last few years that have brought nature and biodiversity to the top of the agenda. If we go to the next slide, please. In terms of who is the nature and biodiversity topic relevant for among private sector actors, again we've heard from clients around the world across sectors, both asset owners and managers, banks, insurers, nonfinancial corporates, private equity managers. They're all looking at these dynamics from different angles, of course, but looking to be able to link how their decision-making may impact nature and biodiversity and how their returns are impacted by the degradation and the nature and biodiversity risk. So in terms of how they're looking to have support around data is both understanding their own impact and dependency on nature and also being able to benchmark against peers or against financial benchmark to see what the performance is currently towards potentially setting targets around this factor in the future. And finally, a major driver in the market right now is the developing TNFD framework. I'm glad to say that we at S&P Global are members of the TNFD task force and have been really involved in helping to develop that framework. And what that is, the Taskforce on Nature-related Financial Disclosures, it frames how private sector companies can measure and manage and ultimately disclose upon both their impacts and dependencies on nature and biodiversity.

Fantastic.

So those are a few of the reasons. But I'm happy to get into more applications in the Q&A.

Great. Yes. And again, just a reminder for those who want to raise a question, I'll be keeping a close eye on the Q&A inbox. We actually do have one question that I'm going to go ahead and ask you, Divya. Considering the current volatile political climate and the pushback against regulation, how do you foresee the future of the market, investors and biodiversity intersecting? Specifically, how can we navigate these challenges and continue to promote sustainable practices and investments that align with biodiversity conservation goals?

Yes. I think we're on a similar trajectory with key nature and biodiversity tipping points as we are with many climate tipping points, where we really need to stem degradation by 2030 and get to net-zero, for example, deforestation, soon after that. So the science is clear around not only the importance of nature and biodiversity but the link to private sector decision-making. And I think that has -- I've been speaking to clients, as I said, in -- I'm here in Singapore currently, in Seoul, in Kuala Lumpur, in New York and San Francisco. And they have all been consistently raising it after seeing the impact in their portfolios of their loan books, usually in a couple of sectors, but then wondering, is this a systemic risk that they really need to be paying attention to? So I think the reality of the situation kind of is transcending short-term kind of volatility.

Thank you. I mean, speaking of all these challenges and the various actors that this biodiversity and nature risk topic is affecting, I'd like to actually ask a polling question and would love to hear from our participants. What, in your opinion, is the biggest challenge to measuring nature and biodiversity risk? And we've got our four choices there. So we'd love to hear from you, if you could take a few seconds to respond. [Voting]

And as we wait on those responses, I'd like to turn to Gautier, who led the research behind our Nature & Biodiversity data solution. Gautier, can you tell us about some of the market challenges with quantifying nature and biodiversity risk? And how does the methodology and the dataset support us with those challenges? And before you answer that, I'm going to check and see what our poll results look like as you -- a great segue into your response. Looks like 37% of our respondents said that the lack of standards and metrics that can be adapted and integrated into reporting, followed by a lack of supply chain data. And you can all see the results. So Gautier, how do we quantify risk? And how does the methodology and data support in these challenges?

Thank you, Sonia. So let's start with us with the challenges. When we started looking into nature and biodiversity a few years ago, we started by speaking with the market and players. And one thing we heard initially was that there was actually no data. But the more we dug, the more we especially found out that there's -- while it's -- there's still some very big gaps in some issues and topics like the marine environment. But generally speaking, there's already a lot of data on nature and biodiversity. But that data tends to be invisible to most of the market players or at least not very well-known. They tend to be produced by NGOs or academic institutions as usually one-off projects. So even though the data is really -- is of high quality, it tends to be stale or not very well-known. These institutions tend to not really have, I guess, the bandwidth and capacity to really distribute their data and make it available. Another challenge as well is that a lot of those datasets tend to sit behind licensing -- copyright or licensing that precludes and prohibits commercial use. So that's making it hard for the commercial players to actually access that data and make it available. So we have to work through that. Once you work through the legal and some of the technical challenges, you realize that a lot of these datasets are actually very complex. It's a lot of big data. You need to have lots of specialists to actually understand what the data means and also more importantly perhaps, what it doesn't mean, which is also why we partnered with an institution like UNEP-WCMC to try and navigate that complexity and reduce that to make it available to our nonspecialist clients. And once you've got all this data on nature and the state of nature or perhaps the impacts that businesses can have on nature, that's so nice and well. But then if you don't understand what's going on, on the ground from a company perspective, if you cannot link this nature and biodiversity data to what companies are doing on the ground, you're not really going very far. So you need differentiated data to connect business activities to those datasets, which is also why we basically partnered with UNEP-WCMC. They bring in a lot of wealth and knowledge on nature data. And we at S&P have a lot of intelligence on companies, including asset-level information. The next challenge is that nature and biodiversity is basically the next carbon. We've all talked about TFND. There's actually some institutions who have an obligation to report this year. This is the case in France. But while there is a ton of CO2 equivalent that allows everybody to measure their greenhouse gas and global warming impact, there's no such thing on nature and biodiversity. So we have to work with that and hopefully try and move the dial to improve things. So we decided to develop that -- an open source methodology with UNEP-WCMC. This method is available to everyone. We released it earlier this year in January. It's open source. It's basically a public good so that it has the potential to be adopted, be -- potentially become a standard as well. We hope that it will evolve. And by all means, we want it to evolve because this is just the first version. And we are fully aware that it will need to evolve as more data and more -- and science makes progress. So when we developed this methodology, we took a step back and tried to not look at all the data challenges that we may face along the journey. And we wanted to develop an approach that would be future-proof so that it wouldn't be necessarily depending on what data is available today. We want to make sure it will be relevant tomorrow when more data becomes available. And we wanted to make sure it would look at nature and nature issues, I guess, in the way we would look at it if there was no data problems. So that's why we came with this idea of the building blocks that we submitted to -- for consultation last year to our [indiscernible] community, making sure that it made sense to everyone and that we were basically doing the right thing. So some basically design principles around that, so first of all, we obviously wanted to cover both impact and dependencies because they are two sides of the same coin. Having said that, when we look at the existing methodologies, we found that impacts tended to focus on a very micro definition of nature, which is biodiversity. And dependencies tended to look at a more macro definition of nature, which is ecosystems. And that makes it very challenging to actually connect the two, where the two are connected, because you're defining nature in two different ways, depending on whether you can find interdependencies. So we wanted to work on that. And that's what we're bringing the WCMC, the concept of ecosystem and ecosystem integrity, which is the common definition of nature across impact and dependencies. And this way, we can actually have that interdependencies between those two aspects. So that was the first design feature. The second design feature is that we wanted to make it data-agnostic. Again, we expect that there's going to be a lot of innovation in that space over the next years or maybe decades. And so we want to make sure that the approach and methodology can be fed with the best available data at any point in time. Third design feature was the modularity of this approach. We need to be able to look at impacts and dependencies on the asset level. We need to be able to disaggregate what they are. We need to be able to aggregate those at the company but also at the portfolio level. So we basically wanted to build a modular framework in a way so that we could aggregate and disaggregate the various aspects. And going forward, maybe even add more blocks, a bit more like a LEGO block way. So we came up with these building blocks, which essentially define both impact and dependencies through two main pillars with the third pillar being basically the risk mitigation components, which is what companies are doing to reduce the impacts or reduce their dependencies. So let's look at impacts. Next slide, please. So impacts, two main pillars. The first one is the magnitude of a potential impact. So essentially, it is looking at how much ecosystem. In our first version, we're looking at how much land companies are using. It's the first dimension of magnitude. The second is at to what extent these businesses and activities are reducing the integrity of the ecosystem that they are operating in. So this is where the concept of ecosystem integrity comes in. And this way, we can then assess to what extent these business activities are impacting the ecosystem. And we can produce basically footprint metrics that just cover this magnitude. So that's all nice and well. That's very close to what existing methodologies we're doing. If you look at the Mean Species Abundance or Potentially Disappeared Fraction, they essentially look at biodiversity footprint in hectares equivalents. And that's what we do with the magnitude, but we look at the entire ecosystem. That's all great. But there was something missing in all existing methodologies. And it was the ability to compare different ecosystems. So far, every single methodology that existed treated all ecosystems basically equally, which is interesting when you're trying to understand to what extent a company -- or companies are degrading more or less the environment. So you can actually compare different business practices or land uses. But when you're trying to answer questions, like where should we place an activity or more importantly, where should we not place an activity, these methodologies are not very useful. And that's because there's the second pillar which was missing from the picture. And that's the significance of the impact. So once you understand what businesses and how businesses are impacting their ecosystem's environment, you need to understand whether that actual ecosystem is significant enough that it perhaps shouldn't be impacted. And so that's why we came up with a concept of significance index. And that's the second pillar. And here, we basically build an index of significance through two lenses. The first one is the biodiversity in species lens. So we look at the significance of any area globally for preservation of biodiversity in species. So it's a very conservation-led lens. And the second line is human-centric. So we look at the criticality of a given ecosystem for the provision of ecosystem services and nature contribution to people. And the combination of these two allow us to basically assess the significance of any ecosystem globally. And when you combine this with your magnitude, we can then define basically our headline metric, which is an ecosystem footprint, which can then express any impact in hectares equivalent of the most pristine and significant ecosystems globally. So it's kind of like expressing an impact in hectares equivalent of your -- of the Amazon forest. And this way, you can aggregate different impacts across companies but then across portfolios as well. And it allows you to have a one, single headline metric for impact to compare companies. And over time, we'll be able to collect risk mitigation data disclosed by companies to refine their risk assessment. So on the next slide, we see a quick hypothetical example. I'd like to take mining companies for those. So let's look at two companies, one operating in the Congo Basin, the other one in Northern Canada. For this example, we said that these companies use the exact same areas of land, so how much land is potentially impacted, the same quantity, let's say, 100 hectares for both, very hard to compare those two companies. Obviously, I forgot to say that they should be extracting the exact same mineral for the sake of this example. Now second level, let's look at the impact on the ecosystem integrity, i.e., what's the resulting ecosystem integrity where these companies are operating. For this example, we assume that the Congolese company is reducing the integrity of its ecosystem by 50% and that the Canadian company is actually reducing it by 80%. So on paper, company A has much better practices, operational practices than company B. So when you calculate an ecosystem integrity footprint, you can then assess the magnitude of the impact. And it's much lower for the Congolese company at 50% versus 80% for the Canadian mining firm. Now let's bring in significance. Obviously, your Congo Basin is a tropical ecosystem, providing critical ecosystem services, not just for climate regulation. And so it has a very high significance index, let's call it, 0.8 in our example, versus potentially a lot less significant arid or mountain zoning in Canada, which provides a lot less habitat for species or a lot less contribution to people and has a much lower significance index. And again, if you integrate that into the equation, you multiply your ecosystem activity footprint with this significance index, and what you figure out is that, in fact, your Congolese firm is actually having a much higher impact overall than the Canadian firm. So we provide the breakdown of all these different metrics so that we can actually use the relevant metric to answer the different questions that we've listed on the screen.

Gautier, I'm going to just step in. I want to weave some of the questions that we've been seeing coming in here. And you may have covered some of these and you may be covering a few more. But I thought I'd leave some of these questions in. One of the questions was on the methodology. Are you using modeling, estimating, using them as proxies? How are you actually measuring that impact and dependency? You talked a little bit about that on impact. But maybe you could get a little bit more specific around the estimations that are embedded in this analytic. And then also, can you talk a little bit about the consistency of the dataset with the EFRAG taxonomies and the forthcoming screening criteria? What kind of inconsistencies might you be seeing across these frameworks?

Sure. So let's start with the question on, I guess, modeling and approach. So we have to recognize that today, companies are disclosing very little. So we had to build a methodology that allows us to model impacts. Having said that, we can feed this methodology with real data on companies when that data is available. So if we look at again the mining sector, for instance, we track thousands of mines globally. And we are using satellite imagery-based datasets to actually track the amount of land that's been used by every single mine. So that's -- here, we're using -- we'll observe data that's not necessarily disclosed but can actually be observed. For some mines, we don't necessarily have that imagery, and so we have to use proxies. So we have a whole range of solutions from the best quality data that is actually observed to model proxies based on capacity, for instance, of production. And that's true for impacts and dependencies. But obviously, going forward, we'll be able to replace any model data with real data. It doesn't change the approach or methodology. So we can actually use both, which is also convenient because, as we've seen in the context of carbon or environmental over the last decade or so, that we started with modeling and then we started feeding disclosures as they became available. And one thing we've noticed is that, at least a few years ago, a lot of these disclosures were patchy. And so the model was allowing us to actually fill in the gaps. So models are only models. And they're never as accurate as we like to think. But they're actually useful to fill the gaps and provide a consistent set of data. In terms of the various frameworks, it's quite a tricky one because there's been a lot of activity, there's a lot of frameworks that are concurrently being developed and bringing their own requirements and metrics. And so we could have waited for all these frameworks to be ready and then bring in our solution or methodology. But we thought that it would probably make more sense to try and be what we thought would make sense how we would basically tackle that issue in -- basically in accordance with what we think makes sense in some of the frameworks and maybe less so. And so that's part of the work that we've done with the TNFD actually. And we tried to be consistent. You will find that the concept of ecosystem integrity is actually in one of the TNFD draft frameworks. We've tried to bring in some of the metrics that are already required. Think about overlap with key biodiversity areas and protected areas. And these are metrics that we are being required by some frameworks and so we provide that. So we work to expand our range of metrics and solutions so that we can help our clients satisfy and tackle not just one but as many frameworks as possible.

We have another question about the data. Is the data evaluating all categories of biodiversity at the level of species, ecosystems and genetic diversity? I think you may cover that.

Yes. So that's a good one. So again, we're not just looking at biodiversity, we're looking at ecosystem. And we're looking at the integrity of an ecosystem. And the way it's defined is through basically three dimensions. The first one is the structure of the ecosystem. So think about the landscape view and all the physical characteristics of that ecosystem. Is it fragmented? And is it being encroached? Is there roads or an infrastructure that's basically impeding on that? The second component is biodiversity, so the composition of what lives in that ecosystem. And here, we look at the number of species, but we're also looking at the relative quantity of -- within each species. So it's a two-dimensional measurement of biodiversity. And we're looking at a very large -- basically a broad range of taxa, based on the PREDICTS database that's publicly available actually and covering both fauna and flora across thousands and thousands of locations. The third component, just to finish on that, is the function. So this is why we look at the extent to which an ecosystem is functioning to the best of its potential and therefore being able to provide the services that we usually expect from that. So let's perhaps move to dependencies and basically the risks associated to these dependencies. So again, two main pillars, complemented with the risk mitigation part, so what companies are actually doing to mitigate those risks. We define dependency risk basically through two main components. And that's very much in line with the usual definition of risk, which is exposure and likelihood of the risk happening. So here, our exposure is covered with our reliance pillar, which essentially measures to what extent a given business activity or company depends on any of the 21 ecosystem services that are part of the ENCORE tool that we use as our basis. So we start with the materiality assessment that's at the process and activity level to define the maturity score, basically, so to what extent any ecosystem service, like water provision, is critical to the process used by a sector or company. So it's very activity, process-based mapping exercise. Now having said that, this is basically an average materiality assessment. So for some ecosystem services, in particular the regulating and maintenance services, the actual relevance of the benefit that's taken from the ecosystem service varies depending on the geography. So think about flood and storm protection, on average, any infrastructure-based activity or sector is reliant on that ecosystem service. That's true on average. Now obviously, you actually depend on that -- benefit from that ecosystem service a lot more if you are in a flood-prone area or in a coastal zone than if you are in a very arid and flat area. So what we do is we use again geolocation of assets to tilt the materiality assessment so that there is a geo-specific component to it for those ecosystem services, where it makes sense. The second pillar is basically the risk of the ecosystem service being -- disappearing or being impacted. And so that's where we assess with the resilience risk. Here, the assumption is that if an ecosystem is of poor integrity, then the risk of resilience of that ecosystem is actually a lot higher. So again, we either use data on the actual resource being available, so think about water scarcity, for instance, or soil. But for those ecosystem services that are very much regulating and maintenance and are systemic in nature, we again assess the integrity of the ecosystem as the proxy for risk of resilience. And because we're doing that, we've got ecosystem integrity being used on the impact side and also on the dependency side, which means that if a company is impacting the integrity of its ecosystem, it will also reduce the resilience of the ecosystem through the Ecosystem Integrity Index and that will have an impact on its dependency risk as well. So this way, we have the interconnection between impact and dependencies locally. So that's pretty much it on the methodology and the -- of dependencies. So again, let's move to a quick example. Let's look at again two mining companies. And those mining companies will be heavily dependent on the ground surface water. If you extract ore, you need water to process that ore. So we start with the materiality score. That's process-based, high materiality, 0.8. Now interesting thing with water. I was talking about the geo-specific tilt, it doesn't matter where you are in the world, you need that water to process that ore. So there's no need to have a geographic tilt of the materiality because it's actually material wherever you are. So having said that, you need that water wherever you are in the world. But obviously, the availability of that water is not the same everywhere. So that's why we're using the -- these two hypothetical examples, one in dry Chilean desert, which is readily affected by droughts. The second company in Northern Canada, where water is not a problem, you can see that the resilience score is obviously much higher for our Chilean company than for the Northern Canada company, which results in an overall composite dependency score that is much higher for the Chilean mining company. So that's how the various scores work. And we again provide the full breakdown of the various scores and its components for all the 21 ecosystem services that we provide. So let's see -- let's look at...

We've got a tone of questions coming in, Gautier. And I hate to break your flow, but I think some of these questions you might want to hear as you take us through the rest of the building blocks. What sectors does S&P -- does this solution cover? Is it applicable across all sectors? Or is it -- or might it be limited to the tools in relation to the sector impacts and dependencies? So does it cover all the sectors...

That's a very good question. So it does cover all sectors. We -- what we've done is we've effectively taken the ENCORE database that basically scores dependencies of industrial processes to ecosystem services. And we've mapped all those processes to our Trucost Environmental database, which consists of 164 sectors. It's based on the NAICS classification. And so we are able to assess any sector going forward. One thing I should mention as well is that we are obviously relying on asset-level information when we have that information. Obviously, we have 1.6 million assets. And that's already pretty good. But we do not cover -- we don't have asset information for every single company in every single sector in our 17,000-company universe. So we have designed the methodology and the approach in a way that we can use a bottom-up assessment using asset-level information. But we can also use a sector-based top-down approach to model what we think the impacts and dependencies are based on the sector and geographical breakdown of the company's revenue so that we can have full coverage. And we obviously provide transparency on which methodology is used for any given company.

We're going to take a closer look at the product now. And I do have a few more questions and then I wanted to move on to understanding how customers should be thinking about integrating this data into their investment analysis process. But just before we move there, do the country actions toward protecting nature and their policies impact the risk score at all? That was one question that came in.