Speaker 0:
Welcome to the sustainability edge on Asset TV. I'm your host for this one, Rory Palmer. Now we've got a packed programme for you today. We're gonna be looking at the Global South and how we finance the the just transition. We'll be looking at the complex landscape of regulating ESG data. And we're also gonna be looking at the hot topic at the moment a I and how that works with ESG. Well, with me in the studio to discuss this, we've got Ben Constable Maxwell, head of impact investing at M and G. We've got Cornelia Anderson

Speaker 0:
had a sustainable finance and investing at El Sig and Patrick Farrell CIO at Charles Stanley.

Speaker 0:
Well, Ben, I'm gonna come to you first, and it's a huge, huge topic to kick off with. But with a lot of the tech leaders warning that a I could have an uncertain path and with something that thinks independently and uses machine learning, do you think a I and sustainable can work? Is it two areas that can marry well together?

Speaker 1:
Yeah. Look, uh, it's a It is a massive question. And as often with these sort of questions, there are kind of two sides to it or or or or many sides to it. Um, I. I mean, thinking about the, uh, the the broad picture. I think what often happens in the context of these big changes, uh, is we tend to sort of overestimate the impact in the short term. So there's a huge amount of hype that builds up. Um, And then,

Speaker 1:
uh, in the longer term, we probably tend to underestimate the sort of huge sort of change in in in society that these these sort of issues will will, uh, will will create, um, and then in the context of generative a I, I think it is. It's got surpluses and and and and minuses. I think so. Some of the positives are the incredible power to drive productivity improvements. Um, efficiency gains. Um,

Speaker 1:
you know, uh, the advances in in in areas like, um medical, uh, diagnostics and and sort of no novel therapeutics that that a technology like this can can enable can facilitate, um, and also things like the improvements in issues like climate modelling, which I think sort of, you know, generative A I and the computational power can drive now. Those are sort of some of the positive aspects, um, alongside just improving access to information and and

Speaker 1:
you know that that efficiency should result in lower cost. So the affordability of information and sort of educational outcomes. There's so many positives. But I think with these things you have to think about the challenges and the potential negatives. And I think there needs to be there for a huge amount of governance, oversight and regulation around this topic to make it safe and fit for the future, Um, and to manage things like

Speaker 1:
the potential risks that sort of existing inequalities get exacerbated or or or or or or um, sort of accentuated. You know, this sort of technology can be a real force for good, but it can be, if it goes into the wrong hands, can cause cha challenges and problems. So I think it's that aspect,

Speaker 1:
and the other aspect is obviously the kind of the emissions from this sort of huge computational power, which we need to ensure do not counterbalance the positive impacts that this technology can

Speaker 0:
have. Well, we'll certainly come back to the emissions and cornea. Welcome to you. Do you think when you look at the positives and the negatives. The positives far outweigh the negatives when we're looking at such a big technology like this. Yeah, so I think the short answer

Speaker 0:
is yes. Right. Um, I think a I is probably something very similar to the next Industrial Revolution. It's a transformational type of technology that will dramatically increase productivity to your point. You know, if you look at a chart of GDP over time, um, you'll see those those shoots up in productivity, which is driven by new advances in technology. And I think a I is very much that,

Speaker 0:
um there's a lot of positive impact also on the point of reducing carbon emissions, right, Because a big driver for carbon emissions globally, today's energy consumption

Speaker 0:
Um, we have a lot of a lot of infrastructure. We have a lot of machinery, a lot of buildings and vehicles which are not energy efficient. Um, and through implementing a I and for example, our energy grids or devices that consume energy, we can actually get a lot smarter. Um, and studies put, you know, the potential number and reduction somewhere like sort of 5% of total global emissions by 2030 which is a pretty significant positive impact for the good. Um,

Speaker 0:
but having said that, right, there are also lots of challenges and risks, and the trouble with something like a I is that how do you regulate?

Speaker 0:
You know, a relatively new technology in new fields of application. It's not an easy thing to do, but I think it's really important that we're starting to surface those issues and hopefully we'll have a debate and see some regulation and guard rail around it. And Patrick last but not least, welcome to you, uh, regulation and guard rails. Is that what's important to you when you're thinking about a I and EG? I think I think it is important because it's an unknown. So, you know, if

Speaker 0:
if we're an investor and we're dealing with uncertainty, there is always, always a big question mark. And from a regulator perspective, I don't know how they're going to actually regulate what is truth to what is not truth. So under that sort of circumstance, it does. It does create that degree of uncertainty,

Speaker 0:
but at the same time we need it. So you know very much around Cornelius's point, the productivity piece that we could get out of this. We all deal in data, and if we can have better data and more analysis of that in a quicker way, I think it actually pertains to be a really good outcome on that. And, you know, we when we talk through from an A I perspective in, um in in an ESG way.

Speaker 0:
I mean the climate models that I've seen, they're incredibly complex and they're compounding. So the warmer weather that we potentially get affects the next iteration of what the model is going to look like. I actually do feel that, you know, from A from a manmade model perspective, we need to have some of that machine learning to be able to sort of take it to the next level.

Speaker 0:
And it's all about information ultimately. So if we can have better information and better detailed modelling, I think it's going to be a great result, but and it was touched upon here. But the issue and you look at it from a different was the green issue. With the amount of processing power most of data centres use.

Speaker 0:
How does that how does that angle then align with the SG message. Do you think it's quite a tough one to then sell back to investors? I think like everything. You you're weighing up the pros and the cons, the positives and the negatives. So under that sort of scenario, we need to see what results it can generate in order to then sort of say, Is it worth it in terms of the amount of power generation? But then ultimately, with all the development in renewable sources, then you know that's an avenue where we can actually achieve that outcome.

Speaker 0:
Good idea. What do you think? See jumping at the Yes, Exactly. So So look, now I agree with that. And, um, I think the key here is the application of the A I technology. So if we do apply it to to the right use cases as in, for example, reducing energy consumption across the board,

Speaker 0:
Uh, that save on carbon emissions will way, um, outweigh anything that's generated by these companies themselves. And I think there's also potential really interesting use case here around applying a I to drive decarbonisation,

Speaker 0:
uh, in the economy in a more broad way. Right. So one of the challenges that we hear about a lot comes from Corporates and particularly small and medium sized Corporates, which don't necessarily have the resources to to engage, you know, with the transition agenda

Speaker 0:
in house. And I think that's where there's a real gap and a real potential to use a I for good. So to to be able to use the data that exists and then put a I on top of it to provide solutions that actually guide Corporates on that decarbonization and transition journey. Um, that's, uh, you know, a real pain point for the economy today, where I think we can see a lot of positive impact. What do you think? You think that's a fair assessment?

Speaker 1:
Yeah, I think it is. Um, you know, in, In, in, in the team that I work, we think about things in the context of net impact, weighing up positives and negatives. And we also think about what the company does or what the solution is,

Speaker 1:
uh, driving versus how it is delivered. And I think the, um you know, we're really talking here about the the good that a I can create in driving efficiencies and on particularly on the climate topic. You know, the way that it can develop a more resilient and and and efficiently managed grid to take on more renewable. That is a massive solution, a massive positive impact that, um,

Speaker 1:
that sort of well directed a generative A I can, uh, can can deliver. Um, but the operational side of it is like is how it is delivered, which is really that that sort of the the energy use and data centres. And I think to the point made earlier it's totally valid that we just need to focus on decarbonising

Speaker 1:
the grid. We need to focus on decarbonising the power that goes into those data centres. They're not inherently low carbon, uh, not inherently high carbon. It's just the energy sources they use to power them are often, uh, high carbon sources. So if we can bring down the,

Speaker 1:
um the the energy use, uh uh, the the fossil derived energy use and still use generative a I to drive positive environmental outcomes, Then I think we're in the right place.

Speaker 0:
Is it important at this point in the debate, especially to distinguish between the enablers and the adopters, Really, the picks and shoves companies versus other ones in the industry.

Speaker 1:
Yeah. I mean exactly, uh, sort of new technology can be, uh can be created by interesting companies and enabled by, you know, for example, the chip manufacturers that can drive it. It can be used by almost any by almost any industry by almost any sector. So I think a I will, um, improve the efficiency cut costs, uh, improve, hopefully accessibility and affordability of products and services right throughout the economy.

Speaker 1:
Um, And then, as you say investors, one of the roles of investors is is to identify those companies that can capitalise on that dynamic and produce the goods, produce the picks and shovels. And obviously, there are companies in the sort of tech sector that that are doing that. And I mean, NVIDIA is the most sort of obvious example. Uh uh uh, that is, uh is right at the centre at the at the forefront of this revolution.

Speaker 1:
Uh, but there are many other companies that, as you say, are both driving the change and benefiting from the change.

Speaker 0:
And NVIDIA? Yeah, it would be hard to do this panel without talking about NVIDIA, but it's one of the most commonly held stocks in US ESG funds. And it's also widely owned in a lot of Europe. Europe's Article nine funds. Do you think?

Speaker 0:
Do you think that's fair? Do you think NVIDIA can be effectively classed as Yeah, Look, look, it's a good question, and I think NVIDIA is a you know, it's it's an example of a broader trend or a broader challenge here, right? And it's interesting, actually, If you look at tech stocks in general, uh, they've had a pretty good run, and, uh, there is an argument that or school of thought that says that is actually driven by sustainability. A lot of the tech stocks being included in various sustainability focused funds.

Speaker 0:
Um, but putting that that's the issue of specific companies to the side a little bit. The the main underlying problem here is really around. How do you assess and understand a sustainable asset, right? How how do you define that? Um, it's not a straightforward thing to do. Um, there are many different views of what actually constitutes sustainable, right? It's a so it's a term that I think needs quite a lot of definition

Speaker 0:
and and the key thing. Whether you are an, you know, an investor or if you're a practitioner is to really be clear on what is it that you are actually investing in, right? What is it that you're putting your resources in? And what is that definition of sustainable in this case? Right.

Speaker 0:
Um, look, there's a whole host of initiatives both from the regulatory side and and elsewhere around this, uh, EU taxonomy, for example. And there are many other similar taxonomy type initiatives that seek to create that the common baseline of definition and understanding around, you know, how do we actually think about whether an asset is sustainable or not? Um

Speaker 0:
so it's It's a little bit of a thorny issue for the industry, and I don't think it's one that we fully landed yet. Uh, the the key is, is all around transparency, right? It's about being very clear around both what you're doing as a corporate, um, what your investment strategy is and how you're defining the different shades of of green. Do you think that's the key there? You got to really nail down what a sustainable company is, especially in this new a I landscape as well, I think.

Speaker 0:
I mean, there's there's definitely no black and white type issue when when we're dealing with a company like NVIDIA, for instance, um, there are always gonna be avenues where they can improve, and so long as they go down a path where they continue to improve in terms of some of the aspects, I think that that's a that'll be a good result. But ESG funds have really benefited from technology companies and investments, and I don't think that's going to change. But I actually do think it provides,

Speaker 0:
you know, just a better scope so that we push back and basically say No, you need to improve on this or you need to improve on that That degree of influence from the investor base is just going to transform not just technology companies for the better. But you know the multitude of other sort of companies and I think

Speaker 0:
you know we need to have sort of better degrees of information. We need to have more transparency and understand the changes

Speaker 0:
in a much quicker way because at the moment things are happening very, very quickly. We just look at the weather patterns and you can see things are happening quickly. And I'm I'm not sure that we're actually on the front foot in terms of how we monitor that particular data, particularly from an investment perspective. Yeah. Can I pick up on that? Um, so So I think what you're touching on is really important, right? And that's where the concept of of transition and transition plans come into play.

Speaker 0:
Um, so look, I think it's probably fair to say that we had, um we think back to cop 26 right? We had, especially in the UK. A whole host of companies announcing targets around decarbonization in particular. Um, and that's great, right? That's step one. But what is even more important than having a solid plan for How are we going to execute and deliver on that? And I think that's where we see a gap right now. So having mechanisms to be able to shine a light on that right? So what is management actually doing?

Speaker 0:
How are they progressing against those targets is critical. Um, And then the other thing, which I think is is a kind of a sign of the increasing maturity in this space. Is this concept of improvers. Um, it it's coming out in a few different regulatory frameworks. Uh, but it's basically saying that, you know, we we sort of evolved our understanding of what the transition journey looks like. And

Speaker 0:
we accept that not all companies are particularly sustainable right now, and I'm using that term in a in a very broad sense. Um, but what matters is that they're taking actions, right? So so recognising that we probably have the the high emitters. We have the low emitters. And then we have the improvers, Uh, and that is actually important. And it's something that that deserves to be be flagged. Um, and so from the point of view of the Corporates,

Speaker 0:
uh, that is something that's seen as a very strong positive. So being able to say that, OK, we may not be where we want to be yet, but here's a plan. And, you know, we label ourselves as an improver. It's certainly an area. I do want to come back to you, and I want to close off this a I but in particular, I I'm gonna go down the line here. But But Ben does this

Speaker 0:
a I boom Does it remind you of anything when it comes to investment? Does it remind you, say, the dot com era? Does it remind you of the early days of ESG when things were ESG negative and ESG positive? Does it seem like a I knows you've either got to be a I positive or a negative. Yeah,

Speaker 1:
it's certainly like a hot topic. It's a big theme at the moment. And I think there's some strong underpinning, uh, realities behind that Uh uh uh, thematic kind of excitement. Um,

Speaker 1:
so I don't think it is, uh, sort of a blue sky behind in the sky. I think this is a really transformative technology, and how it's used will drive massive change and transformation in all sorts of sectors and industries. So I think there is definitely a, um there's a real real underpinning to this. What I would say is that it's sort of very early stage, so it does need though the creation of those norms and protocols and and governance and,

Speaker 1:
uh and and and sort of measuring how these things, uh uh can be used for good or bad. I think that that that is a really interesting point that we are at the moment. Uh, so, yeah, I'd say, um, it's, uh, But the there's there's there's earnings as well, you know, from A from a pure investment perspective, these companies generating phenomenal earnings have got kind of very clear pathways to growth as well. So,

Speaker 1:
uh, I, I think that's an important factor. The other aspect is just simply that there is. It's going to be transformative not just for the companies that produce the technology, but those companies that use it sensibly, sustainably and intelligently. So I think that's a really exciting moment that we're all in right now.

Speaker 0:
What about you? Can you draw parallels with any other investment practises? So So look, I think this is I. I completely agree with that with that comment, right. And I think that a I Rice is very similar to what we've seen in terms of previous industrial revolutions. Right? It is a transformative change in technology which will dramatically increase productivity. Um, it will also I think become

Speaker 0:
a competitive differentiator for a lot of companies. Uh, so obviously we have the the A. I focused companies themselves, but the the companies that are able to use to adopt a I technology and deploy it quickly are going to get a competitive advantage. So So that I think, is very similar to what we've seen, for example, with, um, you know, the the Internet, right? And the companies that managed to shift to, for example, online commerce very quickly, uh, were miles ahead of their competitors That didn't. And some which actually went under.

Speaker 0:
Um so So I think we will see, uh, a very transformative impact of a I was I think Patrick is it echoes of the dot com to the companies that are leading the way. Now, do you think in 5, 10 years we might see displaced? Well, I, I think it's difficult to sort of, um, compare it to, like, ATM T bubble dot com bubble Because

Speaker 0:
look, essentially companies at that particular stage, you know, they weren't generating earnings. It was just the prospect of earnings and how the model basically then sort of evolved is you saw the winners and the losers and it wasn't necessarily the people that sort of started out or the companies that started out down this particular path. I think where we need to sort of take is that I actually do think a I

Speaker 0:
is going to be the sort of next Internet, um, sort of generation, if you like. So in terms of a translation, that's probably one of the sort of key things I would look at. So the ability to share information, that's what the Internet provided and find information and a I. I think you know, it's been in a lot of company models now for 10, 15 years, so the machine learning aspect of it has very much been there.

Speaker 0:
And now I think we're sort of moving into a phase where there's going to be a lot more output generated from an A I perspective And what does that look like? I don't I don't exactly know. How are we going to sort of monitor and how we're going to use that information? I don't think anybody knows, Um, but coming back to the picks and shovels conversation, I think a I is adaptive right across every industry that you look at.

Speaker 0:
So from that perspective, you know, I think it's going to provide basically the facilitation to move companies forward at every level, so you know, as Ben sort of highlighted the diagnostic power that you have. Well, that means we probably don't need to do as much animal testing or other sort of testing sort of forms, you know? And And if I think if I think about other other applications for it are people going to lose their jobs?

Speaker 0:
Look, potentially. There will be a degree of productivity improvements throughout. But how we use this new information, I think it's going to create new jobs the same way that the Internet did in the same way that the computer revolution did. Yeah, I think that's right. There will be a shift, right? So the the net effect will be positive in terms of job creation, but some industries will be impacted. Um, I came across what I thought was a great example of the application of a I in the packaging industry.

Speaker 0:
Uh, so a company that's deployed a I So when they're about to ship up a ship out occur, uh, the machine scans it so the size, the dimensions the volume and then provides the packaging tailored to that particular product, which has lead to 50% reduction in in packaging materials. That's the kind of thing that becomes a competitive advantage, right? Drops down your cost basis. It means you can compete much more aggressively. Uh, so I think we'll see a whole host of those applications which we probably haven't even thought about yet.

Speaker 0:
I'm reluctant to end this debate where it is, which is a shame, but we have to move on, and and then again, if you could kick us off with the next one. So looking at the big, big area of ESG ratings, especially in this space currently and kick us off with this currently, is there enough transparency? Is there enough clarity at the moment for investors? They really know what's under the bonnet.

Speaker 1:
Um, I mean, the the the question of, uh, ESG data, um, is is an enormous one, and I and I, I don't think one could give a sort of, uh, all encompassing answer on on on E elements or levels of transparency. I think there are, um, vendors and, uh, data producers that that we use at M and G that are kind of very clear and transparent about where the data originates.

Speaker 1:
Uh, they've got strong governance around the management of the data and the transparency mechanisms. Um and, um, you know, that recognise the need for transparency and, uh, and the avoidance of risk of being a black box. There are others, though, where we find it a bit more, uh, problematic and difficult to identify how the data and then the insights that are derived from the data. Um, how those have, uh, have been created,

Speaker 1:
uh, gathered and created. So I would say there are good actors and bad or, you know, good practitioners and less good ones. Um, but I I think it's absolutely crucial to have that transparency because investors do need to have trust. Uh, they're using the this data often to construct funds or to really have a to to, um to find their views on whether companies are sustainable or not. So I think it's really critical.

Speaker 1:
The other quick thing, I would say was, would be that while we use, um, external sources of data and aggregators of data and vendors, they're very useful. Improve the efficiency and the productivity of our processes. And at the same time, we think it's really critical for us to,

Speaker 1:
you know, where we need to really gather data to to develop investment insights and sustainable and impact insights. You know, we often want to get the data ourselves. So there's a strong onus on us to gather information and data for the companies that we're investing in from the companies that we invest in, from their sustainability reporting from their regulatory disclosures and actually from often from alternative sources, whether it's sort of academic or scientific sources of data and information.

Speaker 1:
So it's a big picture. But I think on all fronts, transparency is an absolutely critical kind of requirement and responsibility. And

Speaker 0:
you're coming to this panel in a quite unique sense because you've got two sets of data right to derive, then a set of insights after that. So how does it work there? Yeah, yes, we do indeed, Right? So so is the London Stock Exchange Group is one of the largest providers of of market data and analytics, and that includes both data on EG and sustainable finance and investing,

Speaker 0:
Uh, but also, uh, score. So we have two sets to the refinitiv side of the business, and and, um, look, it's a big topic. It's one that we spend a lot of time on. And and our view is very much that the issues around fundamental data and particularly data that is disclosed directly by corporate is something that's really holding us back as as an industry,

Speaker 0:
Um, if you look at disclosure rates today, about 40% of globally listed companies So I'm not even talking about privately held companies. But publicly listed companies do not disclose scope one and two emissions today. Uh, what you would you know could arguably call. This is some of the key data points that you would expect to see in in this area. Um, so there's a really big gap in terms of disclosures from companies. The other challenge around the data itself is the lack of standards,

Speaker 0:
um, and lack of standardised reporting. So companies today tend to disclose their EG data in a number of different ways, right? So you often find yourself looking through various CS R reports, you know, nice glossy reports, uh, where the data is not provided in a standardised way, and that's that's really important, right for the ability to scale this and provide comparable transparent data to the industry

Speaker 0:
as a whole. So if you think about, for example, financial data, you know that you can pick up an annual report from pretty much anywhere in the world, and you're going to see an income statement, a cash flow statement and a balance sheet. And chances are it's going to be for us or or gap in terms of the reporting standard. That's not the case for G data today. And while we've seen some really good progress, the IB standards were launched the other week. Uh, we're still quite a long

Speaker 0:
way away from that, and that creates a fundamental problem for investors when they're looking to deploy capital, make investment decisions, manage risk, manage returns. We don't have that foundational common data set yet. Um, so and as a result, right, the industry sold for this in a few different ways. One is that there are companies such as ourselves and others that spend a lot of time and resources on building these

Speaker 0:
data sets and collecting them on a global basis. Uh, what's also happened is that we see a fairly high level of estimated data. Um, some model data, sometimes a I based sometimes not in order to try and fill some of those gaps. And there there are cases where that is useful. But again, transparency is really key, right? You need to know, as an investor, what is the data that you're working with? And what is that? You know, you're basing your investment decisions on,

Speaker 0:
um So the good news, I think, is I think that there's actually a lot of progress globally towards improved disclosures in the EU. We got the CS DR directive coming, which will mandate corporate disclosures. Um, we also as I mentioned, the launch of the IB standards. So these things are starting to come together, but I think we're probably quite a good few years away from solving that issue. But do you think that's a fair point? I think we're a few years away from being completely where we need to be. I think

Speaker 0:
I think it's a complex issue, you know, it's hard to distil it down into a a nice, glossy report. As you say, You know it. It's I don't think even the companies themselves know exactly all the sort of supply chain impacts that they're basically having. And and when you ask them.

Speaker 0:
You know, can you give us some clarity on that? It's very, very difficult for them to do that. And I actually think that they rely more on the information that they're getting from the ratings houses in terms of how they're doing, as opposed to actually assessing their own requirements. So I think that there is an element where, yes, they are trying to do the right thing and they understand that this is the progress that's going to be made.

Speaker 0:
And I've been looking at these standards for 15 odd years or so and, um, it's only now that they're starting to sort of gravitate towards probably something that's more consistent, and I think that that will then translate in terms of some of the ratings houses as well.

Speaker 0:
And it will give companies a lot more clarity in terms of what they need to do and I. I think the influence that the ratings houses have and what the regulation is going to have on companies actually providing positive progress towards these particular outcomes, I think, is something that's really starting to to gain momentum. But do you think that's fair that the relationship between the companies and the ratings agencies are,

Speaker 1:
um yeah, I think, uh, I think the ratings agencies are pushing, um, companies to disclose. Regulators are doing that. Investors need to use that, um, information. And, uh, the the the the quick point I was gonna add to the debate was, you know, I think we are getting better, and there are better. Um

Speaker 1:
uh, there are better, uh, mechanisms for, um, for for

Speaker 1:
producing data around sort of companies, operational operational management, operational performance on a bunch of different sort of environment and social issues. Um, So whether it's the carbon footprint or whether it's the company's, you know, sort of, um, injury rate frequencies, whether it's sort of the companies, um, gender diversity at the board and and and below,

Speaker 1:
um, those sort of issues, I think kind of transparency data is kind of is is developing, and I think we're getting it into a phenomenally better position than we were even five years ago. And there have been a number of different drivers behind that. I think where we're massively lacking is the data around sort of real world impact of companies on sustainability issues. So you have this kind of concept of double materiality where you want to think not just about how companies are managing the risk to their business and

Speaker 1:
how they are, uh, you know, improving their operational kind of management of the ESG risks. But also, what is the company doing to contribute to or or the opposite big sustainability challenges? So what is the what is the company's footprint on the world? And I think that aspect is massively underrepresented. I just don't think

Speaker 1:
if you ask even an ESG or sustainability fund or fund manager. On the whole, they won't really understand the real world impact of their businesses on on those big sustainability challenges like climate change or tackling inequality or reducing pollution and and waste. Um, so yeah, we have, uh, we we're making real progress on ESGR risk related data.

Speaker 1:
Real world impact data. I think we're miles away from being being on top of

Speaker 0:
that. Do you think that's a fair point? Is real world impact under representing the data? Yeah. No, I think that is fair, right? I think there's a number of areas where we want to do more than what the available data allows us to do today, and and there's a number of these areas, right? Like nature and biodiversity comes to mind. For example,

Speaker 0:
um, where that is a very important issue. It is very impact focused, Uh, but we're really struggling in terms of having enough data to make you know, credible conclusions around that, Uh, but I want to come back to the point around EG ratings and scores and assessments, right, because I think that's an important one. And

Speaker 0:
if you look at the ESG ratings and scores landscape today there, there's a lot of different options out there, right? So there's a lot of different providers. Uh, correlation between the market as a whole different ratings providers is very low, probably 0.3 0.4 at best.

Speaker 0:
Um, so that creates an issue for investors. Perhaps not for the more sophisticated investors who have their own approach and their own, uh, methodology in terms of assessing and understanding these things, but only for the less sophisticated, uh, participants in the market. And that creates an issue in terms of how do you actually know? How do you think about how do you assessing these three credentials? The sustainability profile of your your portfolio.

Speaker 0:
Um, so one of the the big pieces of regulation that's come out in the EU recently is focused on the provision of EG ratings right and scores. Um, and I think it's very important to recognise that there's a big spectrum here. So one end, you got what we'd probably think of as traditional EG. Ratings rights are provided by the ratings houses, which tend to have a pretty high proportion of analyst opinion. Often,

Speaker 0:
you know, uh, based on an element of of private data as well and similar to traditional credit rating and then on the other end of the spectrum, you have what's probably completely a I based right in terms of an automatically calculated, uh, score. I would I would call that rather than a rating. And then you have a spectrum in between. Right? So, um, I think again that transparency is important, right? In terms of understanding, what is it that you're looking at? If you're using an ESG score as part of your business processes, what does that actually tell you?

Speaker 0:
Um, and that is one of the aspects that the new regulation is focusing on is providing that transparency to the market. Um, so you know, again, it keeps coming back to this. This concept of we need to be clear around. What is it that we're actually talking about?

Speaker 0:
Um, so I think that's an important issue. It with ratings and scores and and touch not there with different sophistication of different investors. Does it all get a bit lost in the mud? Is it all a bit too much and too much data? I think as a as a user of those ratings scores and everything like that, Um, I would say it's extremely confusing. So you you do end up, you have to be very focused in terms of OK, what? How did this score arrive?

Speaker 0:
And what is the basis for sort of getting to that score and then translating that back to right. Is that what I'm looking to do for my client portfolios? Ultimately, because then I can actually get some alignment, but having different scores coming from different sort of, uh, ratings, um, houses, you end up well, yeah. I could basically build a portfolio that will do

Speaker 0:
whatever and give it a score of whatever that that to me is unacceptable. You know, we we're in that sort of situation where I need to rely on the information that we provide. And, you know, we need to be able to make sure that it aligns to the way that our clients want their portfolios to be managed. That's the most important element for me. So, yeah, that's where we look to stress test all of our sort of ratings providers in relation to that

Speaker 1:
and and just just from a kind of investor for management perspective, I think we we really need to think about what we use the data for and why it's useful to us. And for us, really. It's about understanding how a company is positioned from a sustainability perspective, whether it's on that, you know, um, inward, out or outward in perspective, that double materiality angle, Um,

Speaker 1:
and you know it's an accountability mechanism. So if a company makes a claim, the data tells us whether that company is genuinely delivering on that claim and that therefore we can trust them and then put them in our portfolios, and our clients can trust what we're doing. So it's a crucial kind of part of the sort of interconnected nexus between investors and their clients and the companies that we invest in. Um, but look, the I, the the the the pretty obvious point. And,

Speaker 1:
uh, maybe one shouldn't mention in a discussion about the importance of data is data can't tell you everything. And there are aspects of the company's performance and their sustainability intentions and and and the purpose. That is often one of the reasons that we'll invest in a company purpose to tackle one of the world's big challenges. You can't always put a number on that, Um, so I think data is crucial. Needs to be transparent, needs to have strong governance

Speaker 1:
and protocols around how it's how it's gathered and how it's delivered. But data doesn't get you the whole way you have to use. I think intuition, uh, analysis and generate your own insights as an investor. And then you have to convey that down the line to our customers so they trust what we're doing on their behalf.

Speaker 0:
And I mean, it comes back to your point that you made before been is we don't know what the impact is of a lot of this sort of analysis, you know what is the real world impact?

Speaker 0:
And governments and companies,

Speaker 0:
If they don't understand what the potential impact Sorry, what the potential impact on what the real world impact is. It's very hard for them to make decisions. It's very hard for them to commit capital and to commit resources to be able to drive those initiatives. So I think as time goes on, we start to see what some of these real world benefits are going to be.

Speaker 0:
And then suddenly they'll just be right. No, this is the right thing to do. It's actually it's actually turning the dial. So does it come back to and then touch on this? But data is in backward looking, and we need to kind of be a bit more forward looking, especially some of these issues.

Speaker 0:
And I also think we need a slightly different approach to how we think about EG data and EG scores and ratings and so on. So, um, as as you mentioned, they're quite they're operational largely in nature today, right? And often used from a risk perspective,

Speaker 0:
I would argue that there's a case for for constructing in next generation of SG assessments right, which also looks at, for example, a company's business model. You know what proportion of revenue comes from sustainable products and services? Uh, or looks at a company's, uh, cap structure. You know what proportion of the cap table comes from sustainable bonds and loans? Are they using EG derivatives, Uh, and so on. So I think we need to actually broaden our view of sustainability in the context of EG assessments.

Speaker 0:
And again, I hate to do this, but we are going to have to move on and the last one here and with a bit of a nod to cop 28 in a few months, we're looking at how we're going to finance and how the climate finance is going to be driven to the global South. It's it's a huge issue, and then again, if you could kick us off with the just transition, it's going to be very, very difficult to bring these countries along. But we've got to find a way to to do

Speaker 1:
that.

Speaker 1:
Yeah, you're right. I mean, uh, sort of it's becoming, um, painfully evident to everyone that the, uh, sort of climate crisis is is is absolutely, uh, here and present, and the impacts of that are being seen and felt sort of right throughout the world.

Speaker 1:
Um, and, you know, we don't need to go into the specific details of that, but it's very clearly a massive challenge. Um, a lot of the impacts of, uh, those, uh, extreme weather events as a result of, of, of of, um, of global warming and climate change are being felt in those regions that are, um, you know, a not responsible for the historic emissions and B um, uh, sort of lower income end of of the global economic scale.

Speaker 1:
Uh, so to your point, those companies, uh, those countries Sorry need, uh, financing to support their transition. I think we can't just in the developed economies say, Look, you know, we're making some progress. Not enough, by the way, some progress towards decarbonising our economies. And by the way, we're sort of just shipping our emissions over to those lower income countries often

Speaker 1:
and then put the onus on them to decarbonise. I think we've got to take this sort of global systemic approach and say, right, how do we through our funds, through our investments and through our uh, policy levers. How do we help direct finance to those countries? Not just to, uh, to develop, you know, low low carbon infrastructure and energy systems, but also to build resilience to the effects of climate change in those countries. So

Speaker 1:
point number one and there will be other ones. But point number one, we've got to recognise that the importance of finance in sort of creating a fair and just transition to, um to to a low carbon future. We've got a significant role as developed, market focused investors to facilitate that

Speaker 0:
Ben makes a good point there. The countries that have done so little to this crisis are now being asked to contribute so much. How do we square that circle? Yeah, No, it's a It's a really important question, and it's one that I think we have to get right. And to your point, it's something that's actually going to require a lot of different participants leaning into this. Now, Um,

Speaker 0:
what I'll say is, I've spent quite a lot of time working on these issues on the ground and particularly the the ASEAN region, and there's a huge amount of innovation on the ground. There um, I was talking to a car parts manufacturer in in Malaysia That's a while ago, and they built a brand new factory, a massive factory, uh, solar panels everywhere. So the it's it's self sufficient in terms of energy, right? And that's the kind of thing that's going to create a competitive advantage over time.

Speaker 0:
Um, so there's a huge amount of innovation and willingness in some of these regions to to actually engage and use, you know, the shift to a low carbon economy to their advantage. But having said that, what I'm concerned about is the fact that we're potentially creating a A moat between the the investors and the capital

Speaker 0:
set in developed markets and the developing markets. And a lot of this, um, and I think comes from regulation and expected standards around data availability and reporting. So, um, as we said earlier, and I think you also articulated this quite well, right that, um, what we need is that, you know, confidence from investors to be able to deploy capital at scale.

Speaker 0:
Um, and currently, what a lot of that hinges on is the availability of data. It's being able to, for example, complying with some of the EU reporting frameworks, uh, that that the investors need to to satisfy. And that is very difficult for a lot of these companies in developing markets to do because they don't have the their appropriate capabilities. There's a knowledge gap. There's a skills gap. Um, and I'm concerned that unless we bridge that and unless we sort of build an understanding and a mechanism

Speaker 0:
for investors to actually deploy capital to these countries, that perhaps don't meet the data quality standards and the reporting standards and then we're going to have a big issue in our hands. So it's almost redundant pushing capital to those areas. If the regulation that data doesn't support well, I think I think it's almost the other way

Speaker 0:
right, that you can't make those investment decisions unless you got at least some credible and robust data, right? It's sort of, you know, the fundamental of the investment process right is that you need some data so you can make your investment decisions. You need to be able to track the risk you need to measure the return,

Speaker 0:
Um, and in some parts of the world, that is that same level of data. As you'd expect for an investment in the EU, for example. That data just isn't available yet. Patrick, the need to decarbonise is is obviously extremely important. But is there a sense that us here in Europe are looking at things from a very euro euro, focus lens and that Australia and South Africa a lot of their jobs rely on the oil and gas and coal industry? I think it's very rich for us to turn around and say how they should be shaping their economies.

Speaker 0:
I think I think we've got to realise that there is going to be an economic impact for a lot of the global South if we're looking at fossil fuel, um, usage, Um and you know, at the time. So when cop 26 was on and there was a commitment to sort of provide some funding from from, you know, probably the global North to the global South, let's say

Speaker 0:
you know, the the world was a lot more harmonious back then. You know it doesn't doesn't sound like too long ago, but in between we've had some fairly significant events that basically started to polarise the world, so those particular events, I think also created, uh, an energy crisis

Speaker 0:
which basically delayed plans. You know, the same. Exactly. The same thing happened in 2007, 2008, when the global financial crisis basically derailed a whole lot of initiatives around sustainability. And I think, you know, a similar sort of thing has happened. But I do feel that with the evidence that we're starting to see tangibly at the moment

Speaker 0:
that we'll be in a situation where hopefully Cop 28 gets the gets things back onto the rails and starts to provide some some really good, um, solutions in relation to how this is going to transform. I think we we've come to a we we've come to a point post the Ukraine. Well, so you know where the Ukraine war, the full impact of the Ukraine war are starting to lessen

Speaker 0:
and that we end up in a situation where you know, we can start to sort of figure out OK, well, rebalancing the world's energy supply is one of the sort of key things that's happened over the course of the last 12 months. We know that energy security, which is, you know, your point that you made, uh, from that company putting in solar power. Energy security for a company is just as important as you know, It is for a country sort of sort of thing. So

Speaker 0:
I think, you know, being able to develop those energy resources those renewable energy resources is absolutely critical. But to be able to fund that is going to be critical as well. And so,

Speaker 0:
yeah, there has to be a transition of wealth from the north to the South in order for them to facilitate that change. Because it is it is a big change. I think, from an Australian perspective, it's not such a big deal. We very much realise that this is the way that we, um this is the way to go forward. And solar is obviously a big usage down in Australia and South Africa. South Africa is going through its own power problems.

Speaker 0:
You know, it needs to have a more energy security, and it can do that with the efficient sort of deployment of renewables. And when you're looking at South America, it's going to be a little bit of a different story, I think. But ultimately, once we sort of develop new technologies and much more commercially viable. Then it's going to make it. It's gonna be a game changer for those economies.

Speaker 0:
But what do you think That the plans are always really good. But are we always one crisis away from everything destabilising again? What do you think?

Speaker 1:
Yeah, I. I think that's why you've got to take a,

Speaker 1:
you know, forward looking, um, proactive rather than backward looking and reactive approach to these to solving problems generally. I mean, anyone would agree with that. But when the problems are the challenges as global and as systemic as as that of the climate crisis, you know, you really have to redouble your efforts to make sure you're you're creating a structured plan. And I think, um, yeah, any plan

Speaker 1:
of transitional transformation needs, uh, funding and financing to make it work, right? That's the kind of glue that's gonna, uh, gonna enable it to happen. And that's why you know I sitting here on this in in this discussion of focusing on there are loads of other aspects of the just transition. The kind of the individual impacts the community, uh, sort of engagement plans

Speaker 1:
getting the kind of local voice into these discussions. But one of the crucial aspects of it is is how do we facilitate finance and, uh and and funding to to enable this transition and adjust transition? And I think that's why we've got to think, What are the structures that will that need to be tackled and addressed to do it? So we need much better policy making, um, at our individual country levels as well as globally via mechanisms such as the,

Speaker 1:
you know, the, um, the the UN and and and its various different agencies around climate. Uh, we need to kind of get policy to actually enable investors to invest with a sort of recognition. These are relatively high risk investments. We need to kind of work out to think about where the risk is, what perception of risk is

Speaker 1:
and how to reduce the risk for investors and our customers to make sure that we can actually allocate that capital to where it needs to be. At the moment, there are way too many blocks. It's much too much of a disjointed kind of global action plan, and it's not working, uh, frankly so, yeah, We need to

Speaker 1:
create much more structure and be much more forward thinking and proactive about it. Do you

Speaker 0:
think that's fair? There are too many blocks currently at the moment. Yes, absolutely right. And I think those blocks are There's probably a couple of big categories there, Right? One is that we talked about the data issues and the the kind of the lack of robust data that creates issues.

Speaker 0:
The other one is regulation and policy. Uh, there is a lot of diversity to put it politely in in this field. Uh, we mentioned EU taxonomy earlier. Um, at our latest count count, there were 47 different taxonomy regimes in different states of implementation globally. Um, we we sometimes refer to this as tax mania in the house and, um but but I think it's, you know, it's It's a telling example of the situation that investors are facing right and also corporate. So

Speaker 0:
in order for you to do business, you know, whether that is, you know, as a supplier to a large corporate, or whether it's as an investor, you're gonna have to comply with all of these diverse regulatory frameworks. And that's a big burden. Um, so the more that we can do to lean into creating that international alignment in terms of regulation and reporting frameworks, the better

Speaker 0:
budget. Do you agree with that? Do you think those blocks at the moment, they're just a bit too insurmountable. Well, I mean, we we we love to over complicate the situation, I think. But ultimately, yeah, the world is the world is getting warmer, the climate is changing. So we we're in. We're in an environment

Speaker 0:
where you need to engineer change, and it has to come down from the top. And there has to be an alignment right throughout. So, you know, there's no 0.1 country going wholeheartedly down a particular path when right next door, you can have a different country doing something completely different. So, you know, we are global investors,

Speaker 0:
so we we need to have some consistency in the overall framework. So we need to remove some of those blocks. We need to get some alignment, and, um and then we need to move forward with progress. Well,

Speaker 1:
one thing I'd quickly add, maybe is that we we talk about the need to, uh um uh, grow and build climate finance. Um

Speaker 1:
and, you know, I think the view there's often a view like right. We need to really just build lots of solar and or wind or other types of renewable generation facilities.

Speaker 1:
And and I think that that that slightly reductionist view probably, I think, kills the discussion and kills the energy a little bit, uh, behind the need to transform all sorts of systems. So I think if you think about you know, the really urgent need to transform our food system and the advantages that can bring and the opportunities that can, uh, that that brings with it.

Speaker 1:
Um And you know, if you talk about the slightly nebulous concept of greenhouse gas emissions into the atmosphere, I just think, you know doesn't really bring everyone along. But if you talk about the importance of nourishing our populations and our families, that that that kind of brings it to a head and I think is a way to, you know, develop a better momentum and better energy, uh, and and buy and buy these things Similarly, if you think about the kind of

Speaker 1:
the emblematic issues around plastic waste that's also a climate issue as well as a kind of environmental pollution issue. And again, I think those are sort of and and you mentioned earlier that the kind of massive risk of nature and biodiversity loss These are all super important issues, totally interconnected with the climate challenge and a lot of them. Uh, if you tackle these issues, they help to solve the climate challenge. So I think we need to take a broader approach. Pull the levers that are gonna,

Speaker 1:
uh, kind of have the right outcomes in different places. It's not always the same lever. It's not just talking about renewables. It's talking about all these other elements, which, actually, I think mobilise people's energy and action much more effectively. Sometimes,

Speaker 0:
uh, and just a point. I want to bring up that you mentioned earlier about a company's competitiveness being low carbon. But of course, a country's competitive being low carbon is of course, going to be very important, too, and China were an early adopter of this. They realised how they could be competitive in the future. But until that happens, it's gonna be quite a difficult playing field.

Speaker 0:
Yes, indeed. Um, so look, I think it's it's that is the right way for the the industry in the market to look at these things, right? So when we talk about DECARBONIZATION to your point right, it's we're going to struggle with traction and adoption if it remains this fairly theoretical, slightly nebulous concept. So actually bringing it back down to what's going to make a difference for me in my day to day, whether that is, you know, cost basis as a company and ability to compete better, whether that

Speaker 0:
it is for for a country that's competing on the international arena or for the individual consumer, I think it's all about creating that tangibility and really understanding what is the impact for my business model for my cost basis for, uh, my revenue streams. So,

Speaker 0:
um, if you look at the green economy, right, so the green economy defined as, uh, revenue generated from sustainable products and services globally, it today it represents about 7% of the total global economy. If there was an industry sector, it would be the fourth largest industry sector. Um, it's it's sort of a A telling data snapshot around the fact that this is actually something that has a material business impact. And,

Speaker 0:
uh, that's probably the right approach. As we start looking at these things, I

Speaker 1:
like the, um, sort of the positive and negative aspect of things. It really interesting your point on on 7% of revenues from kind of clean and green in my mind that you know, which is an amazing development versus 5 10 years ago. In my mind, it should be the other way around. You know, it needs to be probably 7% from the non clean and green in our overall economy. And I think that's a really exciting opportunity about being a sustainability focused investor. Is that

Speaker 1:
that 7% needs to grow to 50% or bigger? And I think there are loads of innovative, pioneering companies that we can invest in that are driving some of those changes to make it a bigger proportion of the pie. If we're really going to tackle the world's problems, you know, so that the overall economy can be clean and green, not just a

Speaker 1:
admittedly bigger but still much too small subsection of

Speaker 0:
it. And and Patrick I want to close off the debate pretty soon. But when I went to cop, 26. 1 of the things that really stuck with me was someone who said in a speech that what we do in Europe is a bit like shuffling deck chairs on the Titanic. Because whatever we do in Europe, if the whole world doesn't come along,

Speaker 0:
it's not going to work. That's not a very helpful way to look at it. But how do we then bring countries along? What is it there and kind of Ben's touching a bit here. How do we make sure countries come with us and we're all aligned here in our views, moving forward? Well, I mean it. It is difficult, but the just the prospect of providing help and assistance in order for that to happen, um, you know, it's, you know, let's

Speaker 0:
getting to a point where obviously, relationships between a lot of different countries at the moment is obviously strained and there needs to be an icebreaker in relation to it. And I think where there are common elements that, um, you know, you can actually talk with the same frame of reference like climate.

Speaker 0:
Um, you can actually make some progress. And I know that, um, I know that Kerry is is looking to go to the from the US to China and just continue the progress that they have in relation to tackling climate issues. Um, and that's an avenue where I think they both share. So I and I think from that perspective, that's really encouraging.

Speaker 0:
But then there needs to be more and there needs to be some leadership. And this is where you know, the the cop meetings actually provide just that forum to sort of get together. But there has to be some leadership, uh, assigned to that at the same time. So I do think it's difficult, you know? And I do think there are other priorities, but,

Speaker 0:
um, I think now you know, I'm I'm sure everyone would agree that there is just such tangible evidence on the news every day in relation to Yes, you know, we need to do something about this, and I think it will refocus a lot of attention very, very quickly. Well, I think that's a great place to leave it. Thank you, everyone, for your thoughts today

Speaker 0:
and thank you very much for watching there so you'll be able to watch the next sustainability edge here on Asset TV. But again, lastly, thanks to Patrick, thanks to Ben. And thanks to Elia, and we'll see you here next time.