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Making Informed Decisions About Climate Risks

Highlights of the CGM webinar "Making Informed Decisions About Climate Risks" in collaboration with the Institutional Investors Council, on Friday 3 September 2021.

The recording is available at the CGM YouTube channel here.

"In essence, we are calling on all company boards and management to start focusing on managing climate risks and tap the ensuing opportunities which would benefit mankind dearly." Puan Rohaya Mohamad Yusof, Chairman of Institutional Investors Council of Malaysia

Now more than ever, information currently available only to specialised and government technical agencies and research institutes needs to become available and understandable to the public and private sectors to strengthen decision-making and inform the allocation of assets and capital.

Access to relevant information classes could support informed investment, lending, and insurance underwriting decisions and improve understanding and analysis of climate-related risks and opportunities.

Ultimately, access to such information will enable investors to engage with companies on the resilience of their strategies and capital spending, which should help avoid transition shocks and promote a smooth transition to a lower-carbon economy.

The speakers from S&P Global were Michael Salvatico the lead for environmental, social and governance (ESG) business development in Asia Pacific at S&P Global Sustainable, based in Sydney, and Sannya Joseph who is Quantitative Specialist at S&P Global Market Intelligence, focused on the Investment Management segment, specifically equities.

Investors are likely heavily exposed to climate risk through the portfolios they manage and the indices in which they invest. 66% of major companies have at least one asset at high risk from the physical impacts of climate change. Measuring the transition risk exposure and alignment of investments to the Paris Agreement can help transition the global economy to a low carbon future and reduce the severity of climate change related physical risks in portfolios.

The panel discussion was moderated by Lya Rahman, Advisor to the Institutional Investors Council of Malaysia and panellists were: Nurhisham Hussein, Chief Strategy Officer, Employees Provident Fund, Azlan Hussein, Director/Head of Equity, KWAP, as well as Michael Salvatico and Sannya Joseph, both from S&P Global

Questions Asked

Both Michael and Sannya have responded to the questions asked during this session, as follows:

1. Should we compare Msia to MSCI world? Should we look at comparison to EM?

SJ: We can use various local, regional or global benchmarks. But it definitely helps to benchmark against the global best to get a better understanding of where are placed globally and where we aspire to be.

2. Hi there, just wondering if we use a broader FBM100 index instead of KLSE, which only consist of 30 companies, would we expect WACI to be higher ? thanks.

SJ: WACI is driven by the weight of the stock as well as its individual carbon intensity. Adding more stocks would bring down the weights of the individual stocks but if the added companies have a high carbon intensity then WACI could be higher. So it’s hard to say without running the calculations if WACI will definitely be higher or lower.

3. To what extent has S&P factored climate risk into corporate credit ratings issued

SJ: Climate Risk is definitely one of S&P’s focus areas. With regards to credit ratings, we have 2 products : ESG Evaluations and Climate Credit Analytics which focuses on an ESG assessment of a company current operations and preparedness as well as the impact of climate change on a company’s ability to generate revenue and its impact on probability of default respectively.

MS: In addition to the products mentioned by SJ. S&P Ratings have incorporated ESG Factors for many years. We incorporate ESG credit factors through the application of our sector-specific criteria when we think the ESG credit factors are, or may be, relevant and material to our credit ratings. Also, ESG credit factors can be positive, neutral or negative to creditworthiness, depending on the entity being rated. At this very moment, S&P Global Ratings are reviewing the proposed additional transparency on ESG Factors as drivers of Credit Ratings.

4. What’s the panel's view on branding as part of your assessment of greenwashing given the lack of standardisation?

SJ: Greenwashing is a very real issue and while it’s heartening that companies are thinking about climate change however, without any real action a firm won’t be making any significant contribution in reducing the threat of climate change. From an investor perspective, we need to deep dive into a company’s business model and proposed transition plans to better evaluate if it’s greenwashing campaign or not. Changing consumer preference can also force the companies to switch to greener alternatives/initiatives. We most definitely need a 360 degree call to action to help address the greenwashing issue.

MS: Greenwashing is addressed by the data driven analysis of companies and investments. Initiatives such as SFDR – Sustainable Finance Disclosure Regulations and NFRD Non-Financial Reporting Directive are ways to identify true green. These initiatives are increasing discussed in an Asia Pacific context.

5. Currently there is no global standard measure for ESG. Multiple bodies have their own standards of measurement. With this, would like to seek the panelists' view on this matter.

SJ: Given that climate change risk and measurement is a relatively new topic, lack of standardization and reporting practices is not surprising. It is heartening to see regional as well as country specific reporting framework because that means there is definite action that would need to be taken by both corporates and investors. As with everything, reporting is always the first and the most important step since it makes it possible for all stakeholders to adopt a data driven approach to identifying solutions. When it comes to sustainability reporting both TCFD and GRI have seen increasing traction globally and in case of an absent county level reporting framework could be a great alternative.

MS: There is discussion about regulating ESG Scores. This is at the early stages of understanding what the standard would include. One thing is clear, standardizing the reporting of climate and ESG metrics would enable more consistent analysis and greater comparability. I was involved in a paper that looked at the benefits of mandatory reporting climate risks as a way to improve the standardization. The report, Confusion to Clarity discusses climate risk reporting, why it is important for companies and investors, the role Australian regulators are playing today, and why Australia needs mandatory reporting that adopts robust, credible and consistent scenarios. I was part of the IGCC working group on this report. Though it references Australia, many of the findings are true for all regions/countries. S&P Global is well placed to provide the standard for ESG Scores and continues to expand the CSA participants.


Reading materials shared by S&P Global:

For insights on carbon foot-printing transition and physical risk aligned with TCFD:

The S&P Global TCFD Report 2021 is an example of industry leading disclosure using robust, standardised analysis with credible scenarios. Please include this as a case study of what can be done.

This paper written with Natixis address Paris Alignment - Investor Portfolio Alignment with the Paris Agreement

It is also helpful to go back to basics and share thought leadership on Creating a Carbon Footprint. Though we have been calculating footprints for a long time, it has become more complex with the introduction of other asset classes and PCAF. It needs to be revisited. Net zero is top of mind as investors navigate the path to net zero. That path includes the use of quality carbon offsets, adding Fuel for Thought: Carbon offsetting goes mainstream as producers set sights on net-zero. A podcast from the S&P Global thought leadership team: Here’s how you stress test for climate risk, according to France’s central bank. It is well worth hearing Laurent Clerc from Bank of France speaks candidly about Climate Change Stress testing.

The analysis and measurement of exposures leads to the implementing of climate resilient solutions with the appropriate climate change benchmark index.

Three of Michael's favourite thought leadership papers are:

Do read the previous CGM blog post relating to this topic "How Asset Owners and Managers Assess Climate Resilience".

Text of the welcome address by Puan Rohaya Yusuf of the EPF:

Welcome Address_Rohaya, Chairman
Download PDF • 97KB

Presentation shared by Michael Salvatico in this webinar:

202108 CGM - SP Sustainable1
Download PDF • 4.24MB

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