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

Hi, everyone. Thank you for joining us for today's webinar. We have an excellent panel lined up for you today from across the divisions of S&P Global. While everyone is getting situated and signing in, I just wanted to share a couple of notes. So my name is Divya Mankikar. I'm Global Head of Sustainability Market Engagement in S&P's Sustainable1 division. And our title of today's webinar is Beyond ESG with Transition Outlooks at Climate Week and COP28. So we have a big autumn of events this year, particularly important lineup from Climate Week in New York through to COP28 in Dubai. And we're going to unpack some of the themes that particularly private sector actors are paying attention to through this -- through the conversations happening at those events. Before we turn to the panel though, I wanted to say very quickly, we recognize that we have a large audience today and this topic is of great interest to you. And so we welcome definitely the interaction and the questions from the audience. In order to submit your questions, you'll see a widget at the bottom of your screen. And you can submit questions there as well as respond to our survey at the end of the webinar. And we do encourage you to please fill out the survey to let us know how this Beyond ESG series is going. Additionally, we'll be referencing throughout the webinar different reports, different research. And that research is available to you in another widget, which is the Resource widget. So please have a look at those after our conversation today. Finally, the webinar is being recorded. And an on-demand version will be available shortly after we finish. So I think with that, we can turn to our panelists. Oh, one other thing is if you do encounter technical issues, you can either refresh your browser, or if that doesn't work, reach out to the team through that chatbox. So turning to our panel. We have three experts really in different elements of the energy transition, again drawing from across S&P Global. We have Atul Arya, Chief Energy Strategist with S&P Global Commodity Insights; Jaspreet Duhra from S&P Dow Jones Indices, who is Managing Director and Global Head of Sustainability Indices; and Sophia Lin, who's Relationship Manager related to market outreach for corporates infrastructure and sustainable finance from our S&P Global Ratings division. And before we turn to them for their comments, we did want to just quickly ask a polling question to help guide our remarks. So the question is -- if we can advance to the polling, there we go. What topic are you most interested in during Climate Week? Is it nature risk and biodiversity loss, the Inflation Reduction Act and its impact on emerging technology, advancing climate change mitigation and adaptation strategies or market trends to address climate-sustainable investments and portfolio? And I think you can only choose one of these options. So we'll give you a second to make that selection. [Voting]

In the meantime, one of the reasons why we're having this webinar today is it actually falls on the 1-year anniversary of the Inflation Reduction Act coming into force. And that is, of course, a hugely relevant set of policies to today's discussion on the energy transition. So it looks like market trends to address climate-sustainable investment and portfolios is the lead, which is perfect because definitely, we have questions for each of our panelists related to that. And so with that, I'd like to turn to you first, Atul, again going back to the fact that it's the 1-year anniversary of the Inflation Reduction Act or IRA, how is it impacting the energy transition in the U.S. from your perspective? And do you see any implications globally even beyond U.S. borders that, that policy is having for fossil fuel demand or technology creation? Would love to hear your remarks on that.

Thank you, Divya, and thank you for inviting me. And thanks, everybody, for joining this webinar. I think as I think everybody would acknowledge, Divya that IRA, Inflation Reduction Act, has really had a monumental impact, particularly in the U.S. but also beyond. So let me just offer you a few data points on what is happening. First of all, we are seeing a huge manufacturing renaissance, clean energy manufacturing renaissance. We are seeing investments in solar PV, in wind, a lot of minerals-related investments for a good reason, come back to that in a minute, and also on batteries. So areas where we had not seen that big slice of investment pre IRA, you're seeing massive investments. According to the American Clean Power Association that 83 new clean energy manufacturing facilities that have been announced, 83. Billions of dollars of new money is coming in. And particularly in the technologies where the rules are very clear, solar is a good example, where we have the incentive structure clear, we are seeing a lot of investments. Another area where we're seeing a lot of investment is in batteries and minerals because of the -- sorry, the domestic content requirement, which the battery manufacturing or the battery components will come into force very, very quickly. And the amount of that content requirement also goes up very quickly. So we are seeing both in terms of building battery plants but also surprisingly investments in mining, so big manufacturing focus. The other big thing we are seeing is, as my colleagues call it, we're seeing a capital transition being -- is being unleashed within the U.S. and around the world. And what we're seeing is both public investment and private investment going into all kind of clean energies. The allocation of capital by players is global, but the deployment of capital is very local, whether it's in the U.S. or around the world. So overall, it's a transformational act. And we shouldn't forget that not just the IRA but also the other two acts which came around the same time, particularly the CHIPS Act, and previous to that, the Infrastructure Act. And all have combined to create this massive growth in investments. In terms of very briefly to talk about what is happening beyond U.S., so other countries, China, European Union, they have their own investment plans and they are investing heavily into clean energy. There, China hasn't slowed down, Europe is ramping up. So we are seeing that big change. Where it is a division is what I call a North and South divide, the Global North countries I mentioned, including China, are investing heavily. Global South is slowly -- investing slowly in clean energy because their focus is on affordability and access to any type of energy. And one of the reasons we're seeing sort of new peak or new highs in demand for oil, gas and coal we will see end of this year and most likely next year is because that demand is being driven by the emerging economies, which are growing quite strongly despite the fears of recession worldwide. And their demand is primarily currently hydrocarbons.

Thank you. And so when you see that pace of development that's being fueled, like you were saying, with 83 new clean energy manufacturing plants in the U.S. and then cross-border impacts, what has been the pace of development specifically for some of the more, I guess, talked-about technologies, for example, batteries or green hydrogen or carbon removal? Have you seen much of a shift in the recent months related to those technologies?

So most of the ones you mentioned, Divya, we are seeing investments. There is one kind of interesting outlier and for a good reason, that is hydrogen. Because one of the big unknowns currently with hydrogen is the definition of green hydrogen. So that, we are waiting -- the companies and the industries are waiting from a ruling from the government, from the Treasury Department and IRS in terms of what the -- and DOE as to what the definition would be of green hydrogen. And that will be -- have a big impact on how people decide to invest and where they want to invest in hydrogen. Outside of that, the other one to mention is sort of broader area of carbon removal. That includes CCS, CCUS and direct air capture. And there, we are seeing -- because the rules are fairly clear, we are seeing a lot of investment. Actually, one of the most interesting things which is happening is companies or private sector companies, a lot of oil and gas companies, are investing into CCS. And just this week, there was an acquisition made by Oxy of one of the large direct air capture companies. So I think we're going to see more activity in that whole space. The last thing I should mention very briefly is we are also seeing some new innovations. So for example, lithium extraction, which has probably been a mining technology is now oil and gas industry, which knows how to drill wells and extract -- inject water and extract oil out or extract fluids out of wells is getting into direct lithium extraction, where you would be able to get lithium-rich brine from wells and then separate the lithium out, so another new technology innovation. So I think we're going to see more of that kind of innovation also as time passes. Just remember, it's only 1 year. And this is going to be a long journey. One other thing I should mention briefly, Divya, is that there are two very big issues out there, which have to be tackled, permitting. Permitting, as they say, is still -- there are a lot of challenges there. And lack of transmission actually is going to slow down clean energy deployment in power sector because without transmission, we can't transmit. Where the demand is versus where solar and wind farms are located is not the same. And therefore, there's a huge need for transmission. And I think we're going to see, as a result of that, more investments in storage because that will help debottleneck some of the transmission, not all of it.

Okay. And related to many of those, like you were just speaking about lithium, one of the often-talked-about challenges and opportunities in the energy transition is around mining and minerals, and particularly the critical minerals that are needed, for example, for batteries. Have you seen a shift in the availability of those minerals? How do you think that might -- that topic of access to minerals might impact the pace of the energy transition?

So critical minerals will impact many different technologies, most -- more significantly is the battery technologies for EVs. And there is a very significant, as I said earlier, domestic content requirement, which actually increases over time. So we are seeing investments. Actually, we're seeing more mining investments in the U.S. than we have seen in the last 12 months. There have been pretty significant investments. And also, the DOE, through its various activities, in particular, the Loan Programs Office, is investing in things like recycling, which will help deal with some of the mineral constraints. But a typical mine can take 15 to 20 years to start, from discovery to actual production. So we need to think about how that can be sped up. And the analogy I will give is in the oil and gas patch, we came up with the shale -- oil and shale gas, which was a short-cycle production. I think we need to think about, are there ways to create some more short-cycle minerals? Not that easy, but I think one of the bright spots there could be recycling. It's still very early days to say how much we could recycle. And we will need to...

Yes, that is interesting. I'm glad to hear about that.

Pardon me?

Sorry, on the recycling point, I'm glad to hear about that. That does sound important in all of this.

Yes.

So I think it was great to hear from Atul in our Commodity Insights division, who are really tracking all of these dynamics at a very detailed level, particularly as it is in the name, looking at commodity flows and pricing. And there's a lot of resources in our Resource box from that division in terms of articles and posts related to this topic. Shifting gears a bit, I wanted to then turn to Sophia Lin to talk about for all of these changes to happen, of course, financing needs to flow towards some of these technologies or companies that are trying to make a transition. And from the Ratings division's perspective, I was curious about the sustainable debt market and what you're seeing as the trends in that market. What is going well? Has there been significant shifts recently and what you think are maybe the ongoing challenges?

Great. Thank you, Divya. So bringing the credit rating agency's perspective on how energy transition is being evaluated when it comes to the sustainable-labeled debt market, so first to level set -- to outline the sustainable debt market and what types of instruments we're talking about. Collectively, this is known as GSSB, or green, social, sustainable and sustainability-linked bonds. Our sustainable finance team conducts Second Party Opinions on those labeled debt issuances like for green bonds. Given this view, earlier in the year, the team helped publish research on the market outlook for such issuance this year. When it comes to different trends happening in that market and what's going well, where the challenges are, first, just to highlight some of those instruments in particular. Green bonds are probably the most clear-cut. They're one of the oldest types of these sustainable debt issuances. And they -- because of their use of proceeds being used to finance eligible projects that are environmental, things like renewable energy, green buildings, sustainable agriculture, those tend to be much clearer to the market. When it comes to a different type of instrument, not a use of proceeds bond like the green bond but a sustainability-linked bond, there's concerns in the market for the inherent financial structure of these bonds, where the issuer needs to meet certain predefined sustainability targets or KPIs in order for the investor to gain a premium or for the issuer to be successful in meeting those targets. Given that structure, it is more flexible for the type of issuer that can do that. You don't need these very clear, obvious green types of issuers and projects. But with that said, there's concern in the market for the credibility and what are those issuer ambitions and incentives to actually achieve those sustainability targets. Will we actually drive changes in corporate behavior? So that concern in the market still exists. Where the sustainable debt market is trending is understanding, big picture, what transition will entail. It's going to be more than these very clear, easy wins of we need more renewable energy or more sustainable agriculture. But how are we going to look at the more in-between areas, the more hard-to-abate sectors? Those are also very important and necessary to achieve transition. So how our S&P Ratings division is approaching that granularity of different kinds of greenness is assessing when we conduct a Second Party Opinion on different use of proceeds bonds for green bonds, what is that level of greenness? We have three shades, dark, medium and light green, referring to the darkest of the green being aligned with a low-carbon, climate-resilient future, a very Paris-aligned future. But for medium and light green, maybe that can account for different hard-to-abate sectors or geographies, where as long as there's a major reduction in emissions, perhaps that's still helpful for transition. It's just not as definitive or necessarily the future state of what transition might look like. So that's how we're seeing this sustainable debt market trend towards better looking at how can we make sure that we're funding all the different components of what's needed for transition beyond just the very easy wins to also accounting for these hard-to-abate sectors and making sure they're part of that transition story. And the final note would be the -- what's not even within the spectrum of dark, medium and light green, just what might never be considered green by the issuer or by the project itself, so how can we still account for activities or projects that are needed for the transition but might be in an inherently so-called dirty sector or dirty type of project but still important for helping us reduce emissions or help us, as Atul had mentioned, a lot of mining of these critical minerals get to that transition state. So in summary, those would be the overall market on sustainable debt market that we're seeing out of S&P Global Ratings and how we're trying to navigate the in-between green states and best communicate with the market how we view those types of issuances. Back to you, Divya.

That's a really interesting point about not just the sort of usual suspects or obvious choices of maybe renewable energy but also all the other services and technologies that enable the transition, for example, around critical minerals and investor interest in a wider range of those topics than just kind of the ones that are known in the energy transition space. I was curious, there's a question here about sort of momentum. Do you happen to have research around issuance and whether it has increased or decreased around sustainability-linked debt?

Definitely. So highlighting some of the previous comments on instruments like green bonds or sustainability-linked bonds, earlier this year, the team had published that research piece looking at the outlook for the overall GSSB market and where we can expect issuance across those instruments. Different drivers of that can be government regulation to a follow-up from last year's COP27, where there was a major call for climate adaptation and resilient funding. There's also need for continuing to better understand how we can look at corporate behavior and corporate targets to reaching these needed services or products or just emissions reductions for transition. So overall, we're seeing continued strength in the green bond space, more limitations in the sustainability-linked bond space, given some of those inherent challenges, and within the green bond space, even within that particular type, better understanding how we can still look at and fund green investments across that spectrum of what is more definitively green and what is still needed but in a more hard-to-abate sector, issuer or project type.

Right. Okay. That makes sense. So shifting a little bit to -- obviously, since we're so lucky to have someone from our Ratings division, how does the energy transition factor into credit? In Sustainable1, we look at, for example, net-zero commitments and carbon emissions of the company, working with investors who are looking at these topics from a wide range of asset classes or for different purposes. But the credit ratings team has a very specific purpose and reason for which they're interacting with the investment community. So how do you think about energy transition and whether it -- for example, net-zero targets factor into credit analysis?

Yes. Great question, Divya. And I'm happy to be here to help share some of the S&P Ratings' side since it's so instrumental when it comes to the credit story. We just have discussed more on the sustainable-labeled debt side. But when it comes to the traditional credit ratings, that question is also constantly raised by investors, "How are we looking at energy transition within credit assessments? How is it impacting creditworthiness?" So I would highlight a few key points in how generally the analysts are looking at that within the existing credit rating. First, it's energy transition, like any kind of financial projection for corporates and other metrics or information being reviewed for companies, it's a starting point. Company commitments to net-zero targets and those transition plan promises, it's a beginning of the conversation. So the analysts would treat that same way as they would something like financial projections from a corporate. For example, if a car company commits to being all electric by a target year and then failed to meet this goal, it would be similar perhaps to failing to meet an earnings target and likewise contribute to a poor track record in assessing that company's credit story. The next key point I would raise is cost in analyzing that, putting on our credit lens hat. So for -- when we look at energy transition, we might wonder, is it reliant on government regulation happening? How much capital would actually be needed to do that transition? Is it a higher cost? And would a higher cost be able to be passed on to the customer or not? So a sector like cement for now likely would have -- be able to pass on those costs because we need cement versus other industries, like apparel, customers, they more easily make substitution choices. So really understanding from the credit story, looking at these different cost factors. And the final key point I would make on the credit side is substitutions. So when -- as these greener products and newer products come to bear, are these being heralded by more new entrants to an industry? Or are the incumbent players in that industry really the ones also owning those new greener products? Who is controlling that transition within that industry? So companies who are already the incumbents, and if they may be able to defend their competitive position and transition, may not be as much a credit threat if they're continuing to be those ones shifting to those greener alternatives. However, if there's a new entrant, perhaps it could present more of a disruptive force when we look at it from the credit story. And one example I would highlight specifically, so in the oil and gas industry, for example, about 2 years ago, the industry risk score for that sector did shift due to acknowledging that there's different climate change-related transition risks. So that's how these transitions may, over time, become more material to the credit story and may need an adjustment in methodology. But overall, within just how analysts are reviewing credit, as long as it's material, when they're looking at these costs or substitution in like business questions, this is all things that can be factored in when it comes to energy transition and credit.

That's great. This is really already painting such a holistic picture of thinking about this energy transition topic from again the commodity side, now the credit and debt issuance story. I'll come back to both of you, Atul and Sophia, with more questions from the audience. But I then wanted to turn to Jaspreet to think about the index investing strategies that our clients are thinking about to also integrate elements of the transition or climate considerations more broadly. So Jaspreet, how have the climate indices that you are speaking with investors about, I think maybe every day, evolved over time over the years? How has -- and how does the index investing tool, I guess, play into a bigger story about energy transition strategy? Are you purely looking at this from a risk management lens? Or do you also see opportunities in index investing to address the energy transition?

Sure. Thanks very much, Divya. Hello, everybody. So yes, we've seen certainly an evolution in climate investing over the last decade or so. But what's quite interesting is that we still see quite a strong interest in some of those first methodologies that we developed several years ago as well as an appetite we're seeing for new methodologies over the last few years. So if we look at the early stages of kind of index methodology development when it came to climate strategies, in particular, we're looking at two areas really: divestment and low-carbon solutions. So divestment, quite straightforward, you're reducing exposure to companies that are involved in fossil fuel reserves. We offer a number of indexing solutions here. And what's interesting is that, like I said, we still see an interest in that kind of approach and strategy. We're actually still launching new indices that have that approach of removing exposure to fossil fuels as well. Low carbon at its most simplest is simply reducing the carbon intensity of an index relative to its parent. This is again a strategy we developed several years ago. It's often more nuanced than this. So it's not simply about reducing our carbon footprint. So for instance, in our flagship carbon-efficient indices, we are lowering the carbon footprint, but we're also ensuring that we maintain exposure across sectors. So that's not about divestment, it's a very different strategy when it comes to looking at low-carbon issues. We're also building an incentive to have more corporate disclosure from companies as well. Now what we've seen in the last few years is perhaps a growing interest in thematic indices. So we see a lot of interest in areas such as clean energy or hydrogen indices that we developed. We see a significant amount of interest in regulatory climate benchmarks, driven by the EU in particular. And we see a trend towards looking at climate not in isolation but alongside other sustainability issues. So I'd say it's fairly rare for us or getting rarer to develop any kind of sustainability index, where you're not having a view to climate considerations as well. So if we hone in a bit on the energy transition in particular and how we're looking at these, we know the context here is we transition to a low-carbon world that there is going to be opportunities for certain companies in certain sectors if they're able to pivot their offerings. So again, the thematic space for us here is particularly interesting because it can give you exposure to those kind of industries, in particular, clean energy being the obvious one. We had Atul talk a little bit about those opportunities already earlier in the webinar. So we have probably one of the most significant clean energy benchmarks globally that provide exposure to companies. We're involved in things like solar, clean energy, geothermal energy, not just producing those energy sources but also the technology surrounding them. What's also interesting to us is the surrounding industries and sectors as well. So of course, we're focusing on the energy sector. But we know that the whole economy is going to have to transition as we move to hopefully 1.5-degree-aligned world. A really classic example there is the automobile sector. There are stats coming out from one of our sister divisions, Mobility, that one in 4 new vehicles sold by 2030 is going to be an electric vehicle. Again, there's opportunities here. We see demand for some, again our thematic industries, we have an Electric Vehicle Index that gives exposure to companies that are up and down the value chain, so in terms of producing electric vehicles but also supplying the technology behind them. But also, outside of thematics, again coming back to that theme of the whole economy needed to transition, when we're looking at some of our broad equity benchmarks as well, we're also thinking about transition and how can we build this entire indices. And again, the EU has really helped us there in terms of coming out with some climate benchmark regulations, so Climate Transition Benchmarks and Paris-Aligned Benchmarks. And again, here, they've gone for that idea of giving people choice. So it's not about kind of telling people how you should be investing your money or what approach to take when it comes to things from that transition. So one of those benchmarks, the Climate Transition Benchmark, stays invested across the economy. It remains invested in companies that might be producing or using fossil fuels. The Paris-Aligned Benchmarks removes exposure to those companies. So I think when it comes to that transition and thinking about transition, it really is about thinking about leaving that choice to the investor because there are different schools of thought when it comes to transition and how it should be handled going forward.

Excellent. Thank you so much. So from the equity standpoint, fixed income, sustainability-linked bonds at the commodity level, there's such a wealth of expertise across S&P on this subject. It's really great to bring this all together. Thank you all so much. I am aware, however, that in different countries or regions of the world, it feels as though the energy transition is moving at different speeds. And I think, Atul, you alluded to this for good reason of different needs in different parts of the world. So from your interaction with clients or through your research, how do you see the difference between regions of how the energy transition is considered either by investors or by nonfinancial corporates? And so maybe, Atul, you can start, but happy for all of the panelists to join in.

So yes, let me start, Divya. I think it's a really good question. And the way we think about this from a Commodity Insights perspective is that there's going to be sort of multispeed and multidimensional transition. It's going to be different in each country. And even within a country, it could be different, depending upon the geography and the endowment that, that country, for example, has in terms of natural resources. And we're already seeing that. But I think at the macro level, what we are seeing is some interesting trends. So one is that actually, if you measure, there are different metrics to transition, right, how much money, how much solar or wind are deployed. But the one important metric is global greenhouse gas emissions, both the total emissions in gigatons and also on GHG concentration. Both of those metrics are going up and not coming down. And the temperature increase is also happening. So a lot more needs to be done. And one of the reasons those emissions are going up is that any improvement and any reduction we see in OECD is far exceeded by increase from non-OECD because that's where the growth is happening. So you can't really blame a particular country or a region for that increase. It's just the reality of the economic growth that emissions come today with economic growth. So I think coming back to our subject here, Divya, and Climate Week and COP28, so what I see happening is that I think this whole issue of multispeed, multidimensional and that how do we bring Global South into the discussion. And more money needs to go to -- already heard about that, we need a lot of money to come in. And that money has to be in different forms, green bonds, perhaps at a lower cost of borrowing. Because the cost of borrowing in a developing world is much higher even for fairly safe and reliable projects like solar PV or wind. So we have to deal with the cost of borrowing, the sheer amount of money, the $100 billion commitment still has not been met. So I think we are going to need to do that. And I think the other thing we haven't touched on is adaptation. You're going to need to spend a lot more money on adaptation because the physical impact of climate change, as some of the questions are alluding, are already happening, not just in the U.S. we are seeing, but around the world with floods and droughts and so on. So more money has to go into the allocation. I think the last thing to say is that from our perspective in Commodity Insights, what we say is that, look, any kind of road to net zero must travel via the Global South and particularly large countries like India. We just did a new report in India, a Look Forward: India. And we say that in the report that the path to net zero has to travel via India for obvious reasons, third-largest emitter, third-largest energy consumer and one of the largest, fastest-growing economy. So it's going to be, as I say, complicated, multispeed, multidimensional. And both the North and the South have to come together. And I think that will be a really important issue, both next month in New York but beyond that in Dubai in COP28.

Absolutely. Thank you so much for bringing those points up. And the India report is also available on our website. I'm not sure that it's in the Resources box, but it's easily available on S&P Global's website. Jaspreet, maybe I can then turn to you. You mentioned in your comments about EU regulation-related climate benchmarks. That's one clear difference in between regions. So maybe I don't know if you want to talk more into that and also what you're hearing from investors based in different regions.

Yes. Sure, happy to. One thing I will say is that it's very, very challenging to create a benchmark that meets the needs of investors on a global basis. Even if you break -- even if we just look at Europe, it's very difficult to create something that speaks to a complete European audience because these are very sophisticated investors for the most part. They have their own views when it comes to responsible investment. We've seen big regulatory bodies like the EU struggle with some issues like nuclear power, should that be green, should not be considered green. So these are the same issues that global investors are trying to grapple with. So trying to create something that speaks to many, many investors is quite a challenge. What is interesting is the EU regulation I mentioned on climate benchmarks, it's a voluntary label that you can choose to create benchmarks around that are net-zero-aligned. It has proved to be fairly successful in that we can be talking to investors in the Americas or in APAC. And if we're talking about a net-zero benchmark, almost always, we're coming back to that regulation as being a baseline, a starting point for thinking about what that kind of benchmark should look like. So in some cases, I think it is possible to try and get some kind of convergence. Having said that though, there is, again even when it comes to net-zero benchmarks, no one-size-fits-all. So there are different approaches, different decarbonization paths that can be used. And some kind of an interesting trend that we see, and again maybe it's not geographically the split because it's kind of the level of sophistication of the investor that you're talking to is this desire for having that multifaceted approach. So even if we're developing an index that might be focused on transition, there is an increasing awareness that transition isn't happening in isolation. So you can be a company that's contributing to the transition, who's still going to be exposed to the discourse of climate change. So there's a desire to have that kind of multifaceted approach to understanding sustainability and climate and transition in a more holistic way as much as that's possible.

Got it. Understood. And Sophia, how about you? I think, again European regulation but also U.S. with again the Inflation Reduction Act may play out differently for different companies. How do you think about the regional kind of dimension in your world?

Definitely. So from the Ratings agency side, first, looking at it through the credit angle, then next through the sustainable-label debt angle. From just companies and credit, we would see a difference right now between like the U.S. and European Union when it comes to a more carrot-versus-stick approach. So in Europe, we're seeing more what we call a stick, where companies might need to pay more by carbon credits by offsets, whereas in the U.S. with the Inflation Reduction Act, presenting a carrot to companies. The government will essentially give them money to invest to do some of these projects or move towards renewable energy. So in a nutshell, we see that the IRA approach is better for incumbent players within an industry to have these tax incentives or financial incentives to do a lot of these energy transition tasks, whereas in Europe, we will see cost increase over time, given some of these actions, like buying the carbon credit offsets and carbon trading schemes, which may cause more disruption in industries there. Then switching over from just credit to the sustainable-labeled debt, we're also seeing, even in our own approach in analyzing the greenness of different labeled debt, what constitutes as green or greener when it comes to a more emerging market versus in a U.S. or a Europe context. So dark green shading is aligned with a low-carbon, climate-resilient future universally across geographies and sectors. But when it comes to the gradation of a more medium or light green shade, that's where you'll start to see the nuance of geography come into play. And that's really rooted in the Paris Agreement and what's constitutes a Paris-aligned future, acknowledging that there are different economies or different hard-to-abate sectors, which will have different pathways to transition. So that's how we're recognizing that there are definitely geographical or regional implications when it comes to how it plays out in sustainable-labeled debt, too.

Excellent. Thank you so much. So when you think about some of these major changes, another one that has actually happened in addition to all the policies we've mentioned is the issuance of new frameworks that might shed light on where companies are in the transition. And one of those is the International Sustainability Standards Board, which formed a couple of years ago, has just earlier this summer issued their S1 and S2 frameworks, S2 being specifically related to global disclosure from companies on their climate strategy. And so I was curious, perhaps this impacts your work, Jas, the most, but curious if you have thoughts about that ISSB framework and how that might enable different innovation in the Indices team.

Yes, sure. Thanks, Divya. So yes, so we're kind of -- we're one step removed from a [ deflection ] world. Being an index provider, we're using data vendors within our indices. Having said that, when we're talking to market and our clients about index methodologies, at least half the conversation is about the underlying dataset. So what is the data that's going into the indices as well as, of course, alongside the actual index methodology? So we spend a lot of time working with our vendors to understand how the data is collected, where are data gaps, how those data gaps are being filled. So we completely welcome anything that's going to help improve disclosure across the board, make it more consistent. That means we can create more credible indices that we take to market. These kind of initiatives, like the ISSB, I think, cooperate with the industry as a whole because we're all aware of some of the criticisms of ESG and sustainability, some of the tailwinds against it. And I think anything we can do to demonstrate that companies are disclosure -- the list of disclosing companies are engaged in terms of these issues, I think, will only help us. An interesting trend we're seeing in the data that we're using within our indices is that there is a growing interest and appetite for forward-looking data as well. So as well as kind of understanding where companies are today, what its footprint might be, what is -- than in the past, there's a very strong desire to get some kind of consistent forward-looking data. And I guess, it's always better in the most part if it is company-disclosed, if it's been audited, if it's been verified. I know that many of our partners will look to model data where it's possible. But this is really important for us to understand transition from a risk perspective as well as from an energy transition perspective, which companies are aware of things like their forward-looking path of setting science-based targets looking forward. And again, coming back to datasets like physical risk, really important to understand where companies are exposed and how they're exposed, so we can build those into our indices before we take them out to market.

Understood. Okay, thank you. So I want to turn -- I have more questions for all of you. But I want to also turn to the questions from the audience, of course. And so maybe I can start with you, Atul. I think Jaspreet mentioned that nuclear is this topic that has received a lot of attention, let's say. And I would say from my experience, country-by-country, there are huge differences in how it is considered with sort of the -- whether it's considered green or not and the amount of permitting or acceptance of this technology potentially increasing or being scaled back in the future. How are you thinking about the evolving dynamics around nuclear?

Yes, a really good question. So in our Commodity Insights scenarios work, we look at all different technologies. And nuclear is a key part of it. And I think I would divide nuclear for simplicity into three buckets. There is what we would call conventional nuclear, which is majority, 99%-plus of current technology which is being used. We see some of that growing. But particularly in places like China and the UAE has a nuclear program. And there are a few other countries who want to do nuclear power. But that's probably going to be the smallest growth area. The most promising growth area in nuclear is the SMR, small modular reactor technology, which has received a lot of interest and a lot of funding. And now we are at the point where some of those large-scale pilots, not kind of lab-scale but larger than that, are being put in the ground. So I think in the next 3, 4, 5 years, we should be able to see what is the path for that SMR technology. And generally, the people who follow -- who are real nuclear experts tell me that it's hugely promising. Given its modularity, you don't need to build a backup plant and the view that we need less material, less nuclear material. And also, it's easier to build in smaller places because it's 300 megawatts, for example, not 1 gigawatt, right? So I think that's the second technology, probably the most promising until end of this decade. Beyond that, there is, of course, the fusion technology, which has generated a lot of excitement. And very recently, just a few weeks back, there was an important milestone which was replicated -- a milestone which was achieved last year was replicated again in earlier -- starting in July. So I think it's -- we shouldn't completely write off fusion. And if we're looking at net zero by 2060, 2070, it's not out of mind that there could be fusion as well. But SMR is the technology which I think most people are banking on to play a pretty important role within the next decade, I would say.

Yes. I think throughout this discussion, we've heard from each of you about this dynamic between what the sort of incumbents are doing in different sectors versus new entrants. Or we have a question about small and medium enterprises from the audience. In my discussions with clients, they are often -- particularly from banks, they ask about how to understand the carbon footprint, for example, or ideally even climate strategy of small and medium enterprises that they are lending to. So I wanted to ask for -- from each of you, how do you think about these new entrants or small and medium enterprises? Do they impact kind of your lens on the energy transition? Maybe, Jas, like small-cap companies or momentum, how do they -- do they figure into this conversation? And how do you think about it?

Yes, sure. Fairly straightforward answer here. So in terms of our kind of broad equity benchmarks, we are sometimes going down into small-cap universes. Almost immediately, what we're finding here is disclosure is an issue. So we're just not seeing the same levels of disclosure when it comes to your large- and mid-caps which again you're coming back to that credibility of an index, if the data is missing, it makes it quite challenging to then put forward a credible sustainability index around it. Where we are able to see a bit more index construction around the smaller caps is again in that thematic space. So if we can go broader in terms of identifying companies who are involved in elements of clean energy or electric vehicle manufacturing, as long as they're listed and, of course, liquid, then we can create an investable index around those. But of course, we know that being a smaller company, it comes with its own challenges. It's not easy being able to report sometimes quite vast ways of ESG and sustainability data. So understandably, there is a challenge there for those corporates as well.

That's helpful. And we also had a question about when we go into the thematic index space about nature and biodiversity, a topic that I'm very involved in on behalf of S&P Global as well but also throughout my career. And so I'm interested, Jas, if you can address -- it's an emerging space. It's much newer than the sort of climate definition. But are biodiversity indices something that is becoming a topic of conversation?

Yes, absolutely. And that's the question. It's been asked a lot of us over the last few years, what are we doing around biodiversity? Can we create a biodiversity index? We've been looking and waiting for the right dataset. And I'm pleased to say now that our colleagues at Sustainable1 have just released a new biodiversity dataset, which focuses on nature and biodiversity. What makes it particularly interesting is that it has the view of risk and dependency. So often, you will see biodiversity datasets that look just to the risk lens, which companies are causing the damage. The dependency angle is really interesting. Now of course, universal challenge here again is going to be disclosure. So we know there's not a lot of companies disclosing information when it comes to biodiversity. So again, it comes down to the quality of the modeling and the underlying dataset. But we are really happy and confident that we have something quite unique using this data to create an index going after market. I think what will be interesting to hear from the market is, is the market ready for a pure-play biodiversity index? Are people ready to start transitioning money into those kind of products? Or will it be something that is used alongside other strategies? We know the interconnections between biodiversity and climate and whether that's a more natural home to use that dataset. But yes, I'd say it's been a hot topic of questions over the last few years. And we're very excited to be working in this space and seeing what we can produce.

Excellent. And I wanted to also come to you, Sophia, with a question about small, medium enterprises or new entrants. You had an interesting point about the positioning of the incumbents. Is there more that you want to say about that? I thought that was interesting how all these dynamics, of course, have a potential impact on credit quality.

Yes, definitely, though I think it really points to the state of technology when in transition, how much of this technology is actually proven today can be adopted by large public companies and how much of this technology is actually still needing to be developed or maybe refined. So Atul earlier had alluded to carbon capture and storage technologies or battery storage. There's more innovation or more development that can be occurring in that -- in those spaces. So once technologies are able to be cost-efficient and to really help move the needle on transition, then they are ready to be adopted by the big players we see. But in the meantime, I think there can be a space for smaller companies who are maybe more actively working on these solutions or within a large company, what are they investing in their research and development, what OpEx and CapEx are they dedicating to that to help foster these technologies, especially if it is in their interest to move towards their net-zero targets. So definitely, opportunities and risks for those all along the small-, medium-cap to large-cap company space.

Okay. And just staying with you on that topic of large-cap companies and -- but specifically, maybe the -- in the hard-to-abate sectors, we have a question about how S&P, I think what they mean is also Global Ratings, would rate the level of greenness for green bonds or sustainability-linked bonds that are issued from those hard-to-abate sectors or high carbon-emitting sectors?

Definitely. So that's -- we're starting to get into this more complicated space, where it just isn't as clear-cut but definitely meeting some of these activities, whether it's -- while we still have fossil fuels in oil and gas, how can we make that better or more efficient and ultimately phase out. So for labeled debt that is helping those activities or issuers more dedicated to the solutions, great. But then like this question raises, what do we do if some of these big major players, like when it comes to potentially oil and gas or other sectors, where those hard-to-abate sectors are definitely still needed for transition? So when it comes to how we're approaching it with the different shades, ultimately it still needs to be on the one end of the spectrum being in line with a low-carbon, climate-resilient future. But then for these more spectrum types of issuers or activities and projects, what can constitute as light green, that's still a murky area. And I would refer to our sustainable finance team, who just published the methodology document on this new integrated SPO approach and how we evaluate those greenness and what technologies and within the context of the issuer, what is the issuer's sustainability strategy? What are the most material factors for that company? What is that big, full picture rather than just evaluating the transition technology alone within that context? So I would refer to that report, which might be linked in the Resource box.

There's such a wealth of resources across. I geeked out prepping for this webinar looking across all the divisions. And it is amazing the depth of knowledge, looking at this issue from so many different angles. Atul, if I can come to you, we're running out of time. So just quickly, if you can address the question, and I apologize, I realize we're jumping around, but we have so many questions that it's great to be able to quickly sort of run through these different topics. So Atul, on the question of countries adopting border carbon adjustments, as you were talking about the Global South and Global North and different pace of change, can you talk to that topic of the cross-border adjustments' potential, I guess?

That should be the topic of our next webinar, Divya. We can spend a lot of time on it, but -- along with my colleagues. I think very briefly, this is CBAM, Carbon Border Adjustment Mechanism, being put in place by European Union. I think it is going to be a significant disadvantage for the emerging economy. So take, for example, the very simple quick case of steel. If I'm making -- building -- manufacturing steel in India and exporting it to Europe, that steel, its carbon content will determine the tariff on it. If I want to, let's say, decarbonize that steel and use hydrogen or some other renewable power, whatever technology I want to use, that's going to be an expensive proposition for me in India. And then it's going to be extra cost burden to do that. So I think CBAM is clearly a challenge for the developing world. Unless they -- by the way, as I mentioned earlier, they need money to decarbonize in general anyway. And then there is this extra burden put on that. So I think the timing of that is very complex. So how all of this will work out, so I think time will tell what happens. And the U.S. is talking about something similar. Because it's revenue, so their politicians would like to get more carbon-related revenue. But again, early days for us to say, well, something would happen on CBAM. Very quickly to mention the innovation piece, we do a lot of tracking of innovation, not SME but innovation in the energy space. And our CI colleagues track investment going into different types of technologies. We follow companies. We look at who is doing what. And particularly, large companies are now investing in VC, in venture capital investment to look at startups and then acquire startups, like I mentioned earlier, Oxy acquiring Carbon Engineering. So all of that is great because more innovation is clearly going to help solve that net-zero challenge.

Well, thank you all so much for participating in this conversation. There are so many decades of experience in research and responding to clients' needs around this energy transition and climate change more broadly and now also nature and biodiversity on the horizon. So I really wanted to express my gratitude and appreciation for all your work over those years and also sharing your insights with us on those topics. We have many questions we weren't able to get to, apologies for that. But we tried to weave as many of those into the conversation as we could. And if you have any follow-up questions, please feel free to get in touch with us. We do have this survey at the end. Please do take the time to complete the survey form. And again, this session was recorded, so you will be shortly receiving a copy of the session and can access it on your own time. So thank you so much for joining us again today. I think all that is left for me to say is goodbye, and have a good rest of your week. And hopefully, we'll have the opportunity to bump into some of you over many, many events that we are hosting through the fall at Climate Week, at COP28 to continue this discussion. Thank you all.