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

Hello, everyone, and welcome to today's webinar. My name is Stephanie Potter. I'm the Director of Sustainable Private Markets with S&P Global Sustainable1. It's my to moderate today's webinar titled Beyond ESG: Scaling Capital for the Energy Transition. Today's webinar is part of a series titled Beyond ESG, taking the conversation beyond traditional ESG topics. Before we jump in, a few housekeeping items. At the bottom of your screen, you will see a row of widget icons. These icons will allow you to interact with us throughout the session. You can access resources mentioned by the presenters in the box in the corner of your screen. There, you'll find more information on continuing the conversation with Sustainable1, my team, including a request to join our event at the Nest Climate Campus in New York City during climate week on a Wednesday, September 25. We hope to see you there. Please notice the Q&A widget, which allows you to submit questions to panelists and myself. I would love to keep this session as interactive as we possibly can and highly encourage you to submit questions, which we will get to either during the session or at the end. Additionally, take note of the survey widget. Do take time to fill out our short survey after the webinar. We highly value your feedback. We use it for content creation. The webinar is being recorded and an on-demand version of the replay will be available shortly. Anyone who signs up to register for the webinar will receive the replay. Lastly, if you encounter any technical issues before the program, please try refreshing your browser. Of course, if issues persist, use the Q&A widget to contact us and a member of our technical team will be happy to assist you. Without further ado, it's my pleasure to turn it over to our esteemed panelists for introductions. Please take your time to give the audience an understanding of your background and your experience in funding or researching the energy transition. So Cindy, I'll send things over to you first.

Hi, everyone, and I'm very glad to be part of this discussion today with S&P and Apollo. My name is Cindy, and I currently Head of the Sustainable Finance team at ING. We're one of the largest institutions in the financial sector with a special focus on financing the sustainable transition. My team provides customized financing advisory solutions to corporates as well as emerging sustainable technologies companies to help them scale out their transition, technologies or implement transition projects within their own operations. My background is primarily in the energy sector. I started out in Power project financing at ING more than 14 years ago. And after 5 years in that space, moved over to energy technology start-up, developing heat exchangers and reactors for high-temperature, high-pressure applications for things like waste-to-X, energy storage. And we started the company from a team of 3 out of a coffee shop to having our own manufacturing facility and having commercial capabilities. And then in 2022, I came back to ING as part of our Sustainable Finance team and have been with the team ever since. We're really excited to see the growth in this sector and how we can do more to facilitate the transition.

Fantastic. Thank you. There has been a huge growth for sure. Jonathan?

Well, good morning, everybody. Looking at the slide, I seem to have been a late addition, but I'm still here. Hi, I'm Jonathan Silver. I work at Apollo Global Management, which is a large private equity investor. A couple of years ago, Apollo announced its intention to invest up to about $100 billion in sustainability-related transactions, and I'm involved in helping to guide that work as Chair of Apollo's Global Climate Council. I've been involved in this work for a long time now. I started my career at McKinsey and then was a partner in and the Chief Operating Officer of Tiger Management, a large hedge fund. The work really began to come together when I took a stop out to look at the public service. I served as the senior policy adviser first at the Secretaries of Commerce and to the Secretaries of Interior, which is where business and environmentalism began to merge. I ran a venture capital firm for 8 or 9 years that focused on a lot of this work, particularly in advanced battery technology and only stopped because I was asked to back into government service, where I ran the federal government's Clean Energy Investment Fund, the loan program at the Department of Energy during the Obama Administration. When I left there, I set up an RIA as Chair of that called Tax Equity Advisors that worked with large Fortune 500 companies on the credits related to solar and wind investing. And before going to Apollo, I was at Guggenheim Partners working on exactly these issues. So I've been doing this for quite a while.

Fantastic. Thank you, Jonathan. And it's impressive to see your experience on both the public and the private side. And lastly, Conway.

Hi, everyone. Thanks so much for joining. I'm Conway Irwin, I'm Director of Cleantech Research & Analysis within Commodity Insights at S&P Global. Commodity Insights provides a really in-depth and holistic view of a really wide range of commodities and markets. That's everything from metals to coal to oil and gas and cleantech. And so it's really kind of built from the ground up. In oil and gas, it may be everything from individual well activity through different pipelines, global supply-demand balances and pricing, of course. And on the cleantech side where I sit, it's global polysilicon production, input cost curves for various cleantech technologies, and of course, installation forecasts for various regions around the globe and even tracking local opposition to new renewables installations within the United States. I started my career in energy in 2006. I was a journalist in Moscow covering the oil sector. And over the last 18 years, I have moved through a variety of research roles in the public and private sectors, a stint in Beijing, working at the U.S. Embassy there, specifically on environment and energy. And now I sit kind of at the top of these various verticals, solar, wind, CCUS, battery storage and, of course, green hydrogen.

Fantastic. And such global experience, Moscow, Beijing, New York. So let's jump in. Conway, can you set the stage a little bit? What do you see from the S&P Commodity Insights research on energy transition financing?

So I want to start with giving you this chart that you can see, it's intended to give a sense of the scale of the opportunity that we see in energy transition. This is specifically our forecast for clean energy technology CapEx for installations of specific technologies, that's mostly encompassed by renewables, battery energy storage, electrolyzers to make green hydrogen, carbon capture utilization and storage and biomass and waste. There's even a little bit of ocean in there, although, obviously, that's a really emerging sector that wouldn't kick in until later in our forecast. And as you can see, we expect CapEx in these specific buckets to exceed $900 billion by 2030. And that's almost a threefold increase over 2020. So really a tremendous opportunity. And I would note that this is not inclusive of really critical areas of energy transition investment, including transmission and distribution, EV charging networks, energy management software. So the scale of the opportunity is even bigger than this chart represents. Insofar as we see various types of financial players facilitating all of this investment in cleantech, we have seen private capital play a bigger role in the last few years than traditionally in the cleantech space. And there are a lot of reasons for this, but a lot of them from our conversations with clients and developers really seem to have to do with flexibility and being the right match for specific projects in emerging spaces. Flexibility in terms of project size, a lot of even utility scale renewable projects might traditionally have been too small to be of interest to a bulge bracket bank. In terms of speed, if you are a renewables developer and you want to access a specific government incentive, for example, you might have a deadline for a start date for construction or for deployment. And in terms of standardization, a lot of these emerging energy technologies are kind of experimenting with new or evolving revenue models. And so it takes a little bit more work at the front end to sort of figure out the right deal structure for a lot of these projects. And of course, the Inflation Reduction Act has also been a huge driver of access to financing for a lot of cleantech, specifically the expectation of very predictable cash like accruals of tax credits for eligible projects that can be sort of a stand-in for operating cash flows. But I do want to be clear that private lenders aren't the only ones who are interested in these very predictable cash flows. And I think something that we have seen, especially over the last 5 years, is a little bit of a breakdown in the strict delineation of what kinds of firms invest in clean energy more and more, and this is especially the case in mature renewables. What used to be considered new energy investing is just energy investing. And I think this is where having the sort of Commodity Insights' holistic view of the market can be really helpful. We do have an upstream oil and gas CapEx forecast. It's analogous to the one you see here for cleantech. And something really significant happened this year when we looked at the 2023 figures. And that was that upstream U.S. oil and gas CapEx was almost at parity with cleantech CapEx for 2023. And maybe more importantly is that in our forecast, if you look at the 2030 figure, it's almost flat to 2023, and that's a really marked contrast to the really robust growth that we see for cleantech. So as new energy financing is increasingly just financing. We've seen an evolution in the financial sector in response. So maybe you see some venture capital firms willing to write a little bigger checks than they were willing to write previously. In private capital, we've seen this kind of explosion of specialized funds specific to various parts of the energy transition, maybe looking specifically at firms that are beyond -- where there's not so much technology risk left, but they're still relatively small in revenue terms. And so the idea is to scale those companies or projects. For large banks and infrastructure funds, we've also seen some flexibility in terms of maybe being willing to operate outside of their traditional parameters and a lot of establishing of specialized teams to look at where there are energy transition opportunities that might be slightly outside the comfort zone, but still work well within the portfolio. And I think what we'll hear from Cindy, will give us a great sense of just how innovative banks can be in this space.

Fantastic. And hearing that traditional and new technologies at parity is certainly going to kind of lead us into some of our client -- our audience questions in just a second. But before we get to these great client -- audience questions, Cindy and Jonathan, can you give us a little bit more insight on your organizations? How are ING, Apollo, kind of going after opportunities to finance the energy transition more effectively? Or excuse me, I'm sorry, can you just set the stage? What do we see? Apologies. Can you set the stage on your organizations and how they're going after financing the energy transition more effectively?

Sure. I can take that. If it'd be okay, I can take a stab at this first.

Yes, sure, absolutely.

So within ING, we really see sustainability as one of our core differentiators, knowing the sectors, knowing the technologies that are being implemented and those sectors are really thinking of creative structures for financing them. And we have a target of EUR 150 billion annually by 2027 to deploy capital towards that end. And we really think of it as tap there from both ends of the issue, right? One side -- on one side, you have emerging technologies that are addressing the energy transition needs. And on the other side, you have the industrials, the hard-to-evade sectors that require those technologies to decarbonize. So on the end user side, we've really gone out and deployed strategic dialogue with our clients to really better understand their transition plans. We call this a client transition plan and dialogue that's part of our overall client engagement approach in really understanding what the -- how they are assessing their transition needs in terms of timing, in terms of capital required, in terms of specific projects to really identify those opportunities early on and to be able to track them as they go through their decision-making processes. On the Emerging Technologies side, we are also going a little bit beyond the traditional banking scope and supporting earlier-stage technologies in their scale up. So looking at things even from an equity perspective. We have a sustainable investments team that has been making equity and junior mezzanine debt investments in those earlier-stage companies as they're looking to demonstrate their technology through partnerships, which we can facilitate given our broader role in the financial services sector and our existing relationship with these large potential end users. And also for my team, particularly, it's connecting those emerging technologies with all the product offerings of our institution. So whether it will be from an advisory perspective, raising equity from sponsors for strategics, or actually formulating financing for specific projects or even just more strategic dialogue regarding partnerships with those end users. So my team really straddles both sides of the equation on both the end-user side and the technology developer side.

And I would say our work at Apollo fits very comfortably inside the framework that Cindy just described about ING and of course, the 2 firms work closely together on many things. I would say on the equity side, basically, the first thing we did was to build a taxonomy, which we follow pretty rigorously. I won't go into a lot of detail, but major categories are energy transition, which would include renewables, biofuels, storage, grid, industrial decarbonization, which -- by which we mean sustainable manufacturing, energy efficiency, emissions management, et cetera. The third would be sustainable mobility, EVs, but also other kinds of mobile transport infrastructure, including charging. The fourth is sustainable resource use. That's really where our work in circular economy, water and waste management, smart ag, all happens there. And then Apollo has a long history, as everyone knows, in real estate. And so we have a sustainable real estate category as well. So that's part one. We built this taxonomy, and the transactions have to fall into that taxonomy. The reason for that is we set up something where we qualify every investment through something we put together called the Climate Task Force, which is essentially our internal group that reviews these transactions from an ESG perspective, I sit on that as do many others. The task force has to sign off on a deal from an ESG perspective before it can even go to an investment committee. We look at the level of sustainable activity in the deal. We assign percentages that qualify against those metrics depending on the opportunity. We look at the revenues aligned with sustainability, the use of proceeds that are going to be dedicated to sustainable use in the, if you're talking about, for example, a green bond. And then separate and apart from all of that, and I won't go to any detail here, we obviously do an enormous amount of work on the credit side in terms of project finance and other kinds of things as well. So we've got a lot of people looking at these deals from a clean perspective.

Fantastic. And even work in helping to set the framework for others in private markets with the ESG IDP. So Apollo is obviously doing a huge amount here, as well as ING. Going into some of our audience questions from [ Philip ]. Having read the book, the price is wrong. His main point about renewable growth is that many of the renewable products are currently not bankable due to low profitability and a high volatility of electricity prices, absent a PPA. Do you also believe that renewable is not bankable? And what do you see as the future? Great question.

Cindy? Do you want to go first, Cindy?

Sure. Happy to chime in here. I'm not sure I quite agree with the statement that renewables is not bankable. I think there is still tremendous room to play in the renewable space. Whether it's wind or solar, of course, I think the margins are thinning just because there is so much supply and growth in that particular sector. But at the same time, I think there are still pockets where there is a need to fill in the gap in meeting many of these locations' sustainability targets and goals in terms of incorporating renewable energy. I think there's also tremendous room to play in balancing the grid needs, right? How do we address the intermittency of renewables with the baseload demand that is required in order for the economy to keep moving at the pace it has been. And I think that's where there is a lot of opportunities for long-duration storage providers or even traders to really get into this space and see how we can better match supply and demand.

Yes. I agree, and I'll even go further than Cindy did. It is true that margins have thinned on large utility-scale projects. But as a general matter, looking globally, we're not in the seventh or eighth inning of maturity on renewable rollout and deployment. We're in the second inning. If you doubt that, the next time you fly into an airport some place, look out as you land on the warehouses around the airport and see if you see any solar panels on those roofs. So I think there's a lot of deployment still to come. And I take the thinning margins as a sign more that the industry is mature and therefore, completely financeable than almost anything else.

And another question here, kind of just going along with -- where do you see the largest capital gaps? And maybe even Conway if you'd like to chime in on that?

Sure. I'd be happy to, although my take on this is going to be very much from the 30,000-foot view. When we look at the capital gaps within clean energy technologies, one of the biggest distinctions we see is between the amount of financing available for mature renewables, like wind and solar and the financing on offer for areas that -- where there's still some significant technology, policy risk, questions about the terminal -- about the value of the end product, so in places -- in technologies like green hydrogen and carbon capture utilization storage. So we've seen this incredible mobilization of capital into mature renewables and really sort of a lot of delays in terms of what's available for the molecule-based solutions that are going to be so critical in the hard-to-abate industrial sectors, right? So in terms of CCUS, you're talking about a pretty mature technology that really hasn't scaled and a lot of CCUS projects are proposed and they just sort of sit on the shelf while they look for financing and are, in many cases, unable to raise the kind of financing that they need, especially for these gigantic projects. In the case of CCUS, that has to do with the value of the CO2, right? What's the value of the end product if you're not in a market that has a clear price on carbon dioxide emissions. And in the case of green hydrogen, you're talking about a product that's going to be sold at a significant premium to existing fossil-based hydrogen. The use cases aren't clear in terms of anything beyond the industrial uses where they -- where hydrogen is already used, at least in the United States, that's true, and how are you going to ship it from point A to point B, right? So all of these questions, all of these big lingering questions, how much policy support, what's the end value, who's the end user, those are the pieces of kind of the energy technology suite where we see finance lacking or lagging, I guess, is a better way to put it.

I mean, if I could just play off something Conway just said, sort of it's a little blip. But as a rule of thumb, if you wonder where there are gaps in the capital sec or gaps in financing in general, really just look at what the solicitations coming out of the Department of Energy are focused on because the public policy goal here is to create enough critical mass around emerging technologies that they can, in fact, be financed, that they are, in fact, eventually bankable by the private sector. So the goal of federal government is not to compete with the private sector here, but to help these emerging technologies get to sufficient critical mass that the private sector can finance sort of solicitation coming out of the DOE loan program or any of a dozen other programs is a pretty good indication of where eventually -- where there's a gap today that we're trying to -- that the government is trying to fix.

I'll add on to that as well. I think there has been a big push by the DOE on the manufacturing side. So when I think about decarbonization, we've had our first wave with really renewable power addressing that particular sector, and then it was in the transport sector with vehicles, electric vehicles. And I think this third wave that we're seeing now is industrial decarbonization, right? How do we switch from existing manufacturing process to manufacturing process that are more energy efficient and more -- and less emissions intensive. And in many of those sectors, I think the challenge is there isn't 1 single knee solution that can address decarbonization needs, right? It's not like I can add on a renewables product. I can just add on an EV fleet. It's more nuanced than that. It requires a lot wider set of technologies and perhaps some that aren't very familiar or have wider applicability beyond that specific sector, right? So if you're talking steel, cement, aluminum, these are, I would say, fairly unique verticals in and of themselves. And so when we look at how do we finance the entire process changing, that requires a significant amount of CapEx that incorporates a lot of these advances that Jonathan and Stephanie, you guys were mentioning certainly, but it's on a much bigger scale than perhaps people are used to with EVs or renewables side. And I think that's where there is a lot of need to really transition the manufacturing space.

Fantastic. And lastly, we'll go to 1 more question, and then I think we're going to answer a few of these in our questionnaire format here. But Conway, we have a question. Did I understand correctly that oil and gas CapEx is flat on 2030 versus 2023, but a significant growth for clean energy projects? And if you don't mind, just going back to Conway's last slide.

Sure. And I'm afraid I'm going to get a little bit wonky in delineating exactly what I mean in terms of these figures. So again, this -- what you see is CapEx for installations of these specific clean energies. And the comparison that I made is to -- is upstream oil and gas CapEx. So that's not downstream. It's not pipelines. It's just upstream. And the answer is yes, roughly flat, not entirely flat. There's a little bit of growth. And actually, there's a bit of a pop in '25, '26, not huge. And then it's tapering off of growth out to 2030. And a big driver of that, I mean, if you have been following the news coming out of China about new vehicle sales, EV is -- it's 51% of new vehicle sales in July of this year. That has a huge impact on the future of oil demand growth. So yes, I mean, effectively, you understood me correctly. I just want to be clear about the nuances.

Perfect. Thank you, Conway. And Cindy, back to you, can you give us a little more insight on ING's corporate goals? And how do these climate financing targets relate to the work that you're doing in the sustainable finance team?

Sure. I already mentioned that a little bit earlier when I talked about our target for EUR 150 billion sustainable volume mobilized every year by 2027. That definitely flows through to my team in terms of how we're assisting both on the corporate client side and the emerging technology side. And on the corporate client side, as part of our transition and conversation with clients is helping them develop targets and KPIs that really tie into our transition story. So there are a lots of things within that conversation beyond just emissions. There's also water, resource use. There are things like developing even human capital so to facilitate that transition. I think that's the often overlooked piece in this challenge. But for us, helping just incorporate those kind of KPIs in their existing financial instruments for those corporates creates a sun shed for them to look at these issues more closely in a more integrated fashion throughout their organization and facilitate investments to make those targets reachable. And this is the other piece on the more traditional sustainable finance side in terms of the green loans, the green bonds that we structure for our clients in helping to gather capital to finance those kind of CapEx that's needed in order to make these goals happen. And I think on the sustainable technology development side, a big part of it is actually going out and engaging with clients across all of these different sectors. They might not be clients that typically fit within our profile if we're looking at revenues and size or capitalization. But for us, we see them as the clients of tomorrow. And we do have internal incentive to go out and really engage with those future clients, understand their technology and facilitate a pathway for them to be bankable. And I think there's a lot of work that we need to do internally within our risk organization and within the greater group beyond just the debt financing and on the equity financing side as well to make sure that everyone is -- has reached consensus around maturity of the technology with the best commercialization pathways and how can we really mobilize the network that we have as ING with our global client footprint to see where we can facilitate those partnership discussions.

And there's a lot of talk around what exactly is a transition, especially when it comes to entity or framework for a financial institution. Can you give us just a quick understanding of ING's Terra approach?

Sure, happy to do that. And this is for a lot of this discussion on financing the transition stem from. So the Terra approach was something that we started in 2018 together with a 2-degree investing initiative to really take a holistic view at ING's own portfolio, our lending portfolio, and see how we can move the needle in guiding those hard-to-abate sectors and most emission-intensive sectors toward a net zero goal by 2050 or earlier. So we started looking at a number of sectors like aviation and transport, real estate, cement, steel, those were the ones that I mentioned earlier, power, oil and gas, obviously. And we look at our lending in terms of projects that we finance as well as the clients that we are financing those portfolios. It's very much, we will see how well they're aligned to the IEA's net zero pathways, which is the one that's used for most of the sectors. And I think that our approach has really -- we were the first to come out with it in 2019, which is when our first report was published. And since then, a number of financial institutions have really adopted very similar approaches and looking at their portfolios. And that guides our conversation with individual clients as well, and it flows through our internal decision-making process for the projects we finance seeing how they could potentially impact our Terra assessments in terms of overall sector financing, how well aligned our sector portfolio is to that net zero pathway.