“You need to understand that the expectations of investors in the future will be that you have ESG information available and it won’t be acceptable to say, ‘We don’t really know what our carbon footprint is.’”
Andrew Steel discusses the growth of ESG investing and how Fitch Ratings provides analysis and credit ratings based on ESG metrics. He lays out some of the challenges faced by a lack of standardization around data companies and investors use to inform decision-making. Ultimately, Steel predicts investing will evolve to the point where companies and institutions will integrate ESG information and evaluation into every decision.
Andrew is responsible for developing and implementing Fitch's sustainable finance strategy, across ratings and the broader Fitch group. His group is based in London, New York, and Hong Kong. In 2019 Fitch Ratings rolled out an integrated cross-asset scoring system for credit ratings to display how environmental, social and governance factors impact individual credit rating decisions. Prior to his current role Andrew held several senior management positions for Fitch in EMEA and Asia. Andrew joined Fitch 17 years ago with a background in project finance, private equity, LBO’s and M&A from investment banking and equity investments. Andrew is currently an advisory committee member of the UN PRI credit ratings initiative, and during the early 2000’s was an independent expert for the UN ECE advising on risk issues and sustainable energy development.
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MODERATOR
SPEAKER
Andrew Steel
Global Head of Sustainable Finance
Fitch Ratings
Anthony Scaramucci
Founder & Managing Partner
SkyBridge
TIMESTAMPS
0:00 - Intro
3:00 - Growth of ESG
4:56 - How to produce ESG insights
9:50 - Evaluating credit risks and working with regulators
13:42 - Data analysis challenges
16:23 - Modern ESG practices
18:17 - Concerns around greenwashing social-washing
20:21 - ESG prevalence
22:35 - Governance in ESG
28:35 - Evaluating climate risks
32:49 - ESG integration and need for labeling
35:35 - Evaluating EV proliferation
40:21 - Needed pace of ESG growth
EPISODE TRANSCRIPT
John Darsie: (00:12)
Hello everyone and welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum and networking platform at the intersection of finance, technology and public policy. SALT Talks are a digital interview series that we started in 2020 with leading investors, creators and thinkers. And our goal on these talks is the same as our goal at our SALT conferences, which we're excited to resume this fall at our home city of New York. But that goal is to provide a window into the mind of subject matter experts, as well as provide a platform for what we think are big ideas that are shaping the future. In the investment world today, there's no bigger idea shaping the future we think than ESG sustainability and there's no greater expert on that than Fitch. So we're excited to welcome Andrew Steel from Fitch to SALT Talks.
John Darsie: (01:02)
Andrew is responsible for developing and implementing Fitch's sustainable finance strategy across ratings and the broader Fitch group. His group is based in London, which he's outside of London today, New York and in Hong Kong. In 2019, Fitch Ratings rolled out an integrated cross asset scoring system for credit ratings to display how environmental, social and governance factors impact individual credit rating decisions. Prior to his current role, Andrew held several senior management positions for Fitch in EMEA and Asia. Andrew joined Fitch 17 years ago with a background in project finance, private equity, LBOs and M&A from investment banking and equity investments. Andrew is currently on the advisory committee for the UNPRI Credit Ratings Initiative. And during the early 2000s, he was an independent expert for the UN ECE advising on risk issues and sustainable energy development. Andrew graduated from Bristol University with a degree in psychology and as a postgraduate diploma from INSEAD in global management. Hosting today's talk is Anthony Scaramucci who's the managing partner of SkyBridge Capital, which is a global alternative investment firm. Anthony is also the chairman of SALT. And with that, I'll turn it over to Anthony for the interview.
Anthony Scaramucci: (02:19)
Andrew, once in a while, John Darsie allows me to do these interviews. So I want to be grateful to you John. I just want to personally thank you. So let's get right into it Andrew and in 2015, you said since 2015 investors have been calling on credit agencies and credit rating companies to get involved in the ESG story and to help investors, institutional investors figure out which companies are adapting sort of ESG practices. Where are we now, sir?
Andrew Steel: (02:57)
Thanks Anthony and thanks John for intro. Yeah, that is something which very much came to the fore in 2015, but I think there's background to it. It's important to remember that ES&G risk issues are not new. They've always been around. And in fact, we have seen investors doing ethical investing for hundreds of years already so the fact that this became far more prominent from 2015 onwards was largely around I think most of the issues that have risen to the fore in terms of climate change. I think there was also a desire amongst financial institutions to try and do some image rebuilding post the global financial crisis and to try and sort of demonstrate that not only were they doing well, but they could also do good at the same time. And so from that sort of 2015 point onwards where we had the social development goals, sort of the standard development goals from the UN being launched and increasing news content around climate change, we saw a real focus on environmental issues.
Andrew Steel: (04:05)
I think the pandemic since then has also caused there to be a heightened interest in social issues. And we'll perhaps come on to talk about that. And it's been a lot of asset owners, I think in general stakeholders in across many industries, in fact, that have been keen to be able to demonstrate how they are also helping to solve some of these issues. And that's really moved from a sort of exclusion policy for investors through now to something which is far more integrated and much more part of the normal process of investment or a fund.
Anthony Scaramucci: (04:40)
Take us through the steps, Andrew, meaning your firm, you have analysts, you have research, you have outreach. Take us through the steps of Fitch in terms of how you synthesize product.
Andrew Steel: (04:56)
Oh and this is quite a journey that we've been on since sort of the early 2018 period particularly as regards ESG. And I think our initial focus with this ask from investors to provide more granularity and transparency around the influence of ESG was very much, we started off by looking at our bread and butter, which is providing independent insight and opinion around credit and credit profiles of entities. And so what we did was we actually started looking at this maybe slightly differently to how others had looked at it in the market to that point. And we said, okay, if we are saying that as an agency, this stuff isn't new and that it's always been there, then how can we extract it and how can we display the ES&G risks as a separate category of risks? And so what we did was we spent a lot of time working with our credit analysts to help adjust the focus of that credit lens that they view everything through.
Andrew Steel: (06:02)
And so we spent time identifying the credit aspects that were relevant for environmental, social and governance factors across each different industry sector and asset class. And it was clear as we did that that this was something that really needed integration into the analysis that we did. So it was a seamless process. So the external parties could see how much of the credit decision we were making was being influenced by this particular sub category of risks. And as we did that, it was clearly very credit focused. It was focused on the credit rating horizons and forecasts that we look at, but it also became apparent to us that you kind of needed to go beyond that. So we needed to look at producing more research around some of the themes and the issues of how they would develop.
Andrew Steel: (06:47)
And so we refocused some of our research team. We created a dedicated research team and we also started doing scenario analysis, particularly when it came to environmental risks because a lot of the crystallization of the cost aspects of environmental risks are over a much longer term. And with that in mind, we've also been working in the background in the last year or so doing a lot of product development and looking at how we can maybe expand also into pure ESG analysis as well.
Anthony Scaramucci: (07:19)
Is it working Andrew? People are picking it up, adopting it? They're using it as a portfolio mechanism and it's influencing the management teams of these companies?
Andrew Steel: (07:33)
I think the short answer to that is yes. And it's not just what we're doing, it's what others are doing in the market as well. I mean, it is interesting when you look at the market as a whole, you see a lot of people who've developed niche solutions to particular individual problems that investors have come across or the market's been been interested in. But I think the unique thing about what we did was we looked at how we perform financial analysis and it's larger... It's a mix of quantitative and qualitative. We then looked at ESG as a subcategory and said does that neatly map to an individual aspect of quantitative analysis for a particular issue or a particular sector? And as we went through the process of trying to extract these ES&G risks from our credit criteria to display them separately, what we discovered is actually as a risk category, it's not very well aligned with an individual area of qualitative analysis or individual area of quantitative analysis.
Andrew Steel: (08:33)
What you find is that individual aspects of environmental, social, governance risks tend to end up spanning several different areas of quantitative and qualitative analysis and influencing those if they materialize and crystallize. And so what we try to do is, and I think we've been pretty successful in doing, and that's why it's started to be quite popular is to be very transparent and granular about how that happens. So it's not a sort of sector based approach, but it's a very specific entity and transaction based approach. Now that is highly technical. And it is also just a portion of the overall equation for an ESG investor. It's the very specific credit portion.
Anthony Scaramucci: (09:18)
It make sense. I guess what I'm very impressed by is the combination of different forces, but how big a role Fitch is playing in actually moving the boulder down the hill. You do have situations where your credit centric scale will sometimes weigh heavily polluting fossil fuel producers, similarly to somebody that's in the renewable business. Is that something you can discuss and why that happens?
Andrew Steel: (09:50)
Yeah, sure. I mean, it is very much the case and that is because we are purely, with our credit ratings and the ESG relevant scores that we produce as an integral part of that, we are purely looking at the credit risk aspects. And so we're not looking at the good or the bad. We're only looking at carbon emissions increasing if there's a credit consequence to that. And a good example that we like to use there is just because you are, say an electricity generation company that only produces electricity from wind turbines, just because you're a neutral energy entity doesn't mean that your credit profile is stronger. If you are a renewable energy entity and the wind turbine electricity that you produce is sold under a feed in tariff and it gets priority of dispatch, then yes, your credit profile is going to be much better.
Andrew Steel: (10:47)
If you actually having to sell into a merchant market and you're a price taker with no priority of dispatch, then actually you're going to have a really poor credit profile. And there was a lot of confusion in the market up until we started to produce this stuff around about the beginning of 2019 where people were saying, oh yeah, yeah, yeah. But because it's a renewable business, it should have a really strong credit rating. And the answer is credit is not the same as ESG. There is a credit component to ESG and isolating that is extremely important. And it's part of the overall analysis toolkit that's required for investors to be able to do their job properly in this space.
Anthony Scaramucci: (11:28)
And how do you guys intersect with the regulators from the various global community of regulators?
Andrew Steel: (11:37)
Yeah, that's a very good and a very interesting question. There is a lot of increased interest from regulators in ESG. The interesting thing about ESG relevant schools that we've produced is they are produced by our regulated business. And so they are fully under the [inaudible 00:11:53] of regulators such as AZMA and the SEC. It's just an integral part of the credit ratings process. That means, in terms of our doing that, it was tough. It was granular. We had to meet very stringent standards. When you look beyond that pure credit aspect, which I was talking about earlier, and you start to look at the bigger picture, pure ESG analysis. So you start to look at that good or bad contribution to social goals and the longer term, you look at preparedness for decarbonization in an industry, then actually there's a lot more subjectivity in that.
Andrew Steel: (12:34)
There's a lot of issues that I think we'll come to talk about around standardization of data, what metrics you should be looking at. And in that respect, it's very much an evolving market. And so from a regulatory perspective, when the regulators are looking at what's going on in ESG at the moment, I think they're starting to become more and more interested because they see more and more influence particularly where you have things like sustainability linked bonds with coupons that are linked to ESG ratings from ESG service providers. And that really, I think, was the trigger point some sort of 18 months or so ago for increased regulatory interest. As the regulators start to look at this and they say, well, hang on a second, we've got pricing triggers occurring in the market from opinion providers who are completely unregulated. And that to my mind is what will mainly drive regulation fairly quickly into this market. Particularly as we've seen sustainability linked claims, increasing a lot in activity recently.
Anthony Scaramucci: (13:33)
Andrew you're also in the data business. Data is super important to make this analysis. Tell us what some of the challenges are there.
Andrew Steel: (13:42)
Well, the challenges have to be a huge, and I'm sure you're aware of that. Most of the most of the listeners are going to be aware of that as well. They're all very big challenges, but then on the positive side, there are a lot of initiatives going on to try and tackle these challenges. And the biggest challenges really are standardization and harmonization of information. I mean, particularly for us as an agency that's largely focused on financial analysis to date, we're used to seeing fairly clear and understandable standards. IFRS, et cetera, where there is a way to report information. There are clear metrics surrounding the reporting of that information. It's easy for financial auditors to conduct an audit on the information that a company provides and be very clear about how compliant that company is or isn't. When it comes to ESG, that sort of stuff is still very much in the early days.
Andrew Steel: (14:43)
And that's very, very problematic actually for most of the companies in the industry sectors that we look at and the investors want to invest in, because what it means is if you're a company and you're being asked for ESG data, if there are no clear standards, there's no harmonization, then it's very difficult for you to know what data you should be gathering internally, how you should be producing metrics to demonstrate your compliance with targets around that data and therefore what can be audited and what you can provide to the market in terms of standardized information. And so that sort of pushing and pulling that's going on between should we set the standards first or let the market decide what the standards are? That's causing huge, huge problems. There is a lot of momentum behind trying to resolve that. And we're seeing people like IFR are starting to get interested in it. And I think that's helping. As well as we're seeing quite substantial initiatives between different countries and regions. So there's a very big initiative at the moment between the EU, the UK and China on standards harmonization. Also the US is starting to sort of pick up the ball on this and the sort of increasing interest at the federal level in the US is definitely going to help push all of this forward, I think.
Anthony Scaramucci: (16:05)
What would you say to a company that is behind the curve as it relates to their carbon footprint or their longterm strategy to get into the acceptability standards of ESG? What type of advice would you give them, Andrew?
Andrew Steel: (16:24)
Well, that's a good question to Anthony and it's one where I have to say we are not allowed to provide advice as a regulated rating agency so I can't provide advice. I can comment on what perhaps are some of the issues for companies. I think there is mounting evidence the over time, no matter what you do, no matter what asset class you're looking at, no matter what sector you are in, there is evidence that reporting on your ESG credentials will just become an integral part of what you need to do to be eligible for investors. And to the extent you don't do that, there'll be liquidity issues going forwards. Now that'll happen over time. And I think what we'll see is that governance tends to be reasonably well reported on.
Andrew Steel: (17:23)
Environmental standards or are appearing for that much more quickly. Social is going to be very difficult. But if you're an entity, then you need to understand that the expectation of investors in the future will be that you have this information available and that it won't be acceptable to say, well, actually we don't really know what our carbon footprint is. And so, in a sense, you don't need it immediately now, but if you're not starting to look at how you gather that information, if you're not keeping up with your competitors in the space, then you will disadvantage yourself over time.
Anthony Scaramucci: (18:01)
Let me ask a different question. Is it possible for people to game the system or is the system so transparent now from an ESG perspective that they can't do that?
Andrew Steel: (18:16)
No, they can definitely game the system. I mean, this is an evolving market and I think we were chatting just before we started this session about green washing, we're also seeing some social washing as well where people are sort of claiming social benefits from activities which are really much more geared to sort of build client basis and a clearly commercial rather than social in nature. But again, the sort of change in mindset for people of the need to report on this and the need to think about it is an important step forward even if we do see some green washing and some social washing along the way. I mean, for some big financial institutions, for instance, it's very easy for them to reclassify parcels of assets into being either environmentally friendly or socially friendly, but they weren't created in the first place for that purpose.
Andrew Steel: (19:15)
They were created because they were commercially viable. But the interesting thing is once you start to label and you start to define your portfolios like that, when it comes up for refinancing or renewal, then actually you do have to think about it. You can't substitute it with whatever assets are going to be the most commercially viable at the time. You will have moved your mindset into one that says, well, actually hang on this as a green activity that we do, or this is a social activity that we do. So whilst a lot of people get excited about it, I actually think it's going to happen. And actually there are positives to it as well because it does help change mindsets amongst management.
Anthony Scaramucci: (19:56)
Got it. I'm going to get John Darsie in here in a second. And just remember before we started Andrew, John said that us as baby boomers destroyed the planet. I just want to make sure you know that it's you and me against him. But before we [crosstalk 00:20:09]
John Darsie: (20:08)
I will confirm those comments.
Anthony Scaramucci: (20:10)
Where is ESG really taking hold and in finance? Is it just in Wall Street or is it very widespread?
Andrew Steel: (20:20)
It's very widespread. It certainly isn't. I think Wall Street tends to react to the challenges that are posed to it. It's good at innovation. It's good at coming up with products to meet needs, but the real push from this has come from a mix, I mean, it depends where you are on the world, but it's coming from a mixture of public opinion, some science around climate change and it's very much been driven by asset owners wanting to start to see what is actually happening with the funds that they're providing for asset managers to invest. And so you've got asset managers, owners and the stakeholders starting to say, well, yeah, I do want a return on my investment, but I want to ensure that I'm not doing harm. So maybe it may be Anthony, you and I can sort of come back at John and say, well, we're helping to drive the change in how funds are applied because we're the ones who are sitting on the cash. It may be people like John and his generation who need to come up with the clever, innovative ideas but.
Anthony Scaramucci: (21:31)
Yeah. You better be careful. We're sitting on the cash. Okay? So you better be careful and respectfully ask these questions Mr. Darsie. Go ahead Mr. Darsie.
John Darsie: (21:41)
All right. Well, I'll do my best despite all the damage you guys have done to the world. I'll leave Andrew out of it because I think he seems like a responsible guy but Anthony with his Lamborghini and his Bentley [crosstalk 00:21:55]
Anthony Scaramucci: (21:55)
Oh my god, here we go. Okay. This guy's living on like a seven acre estate. He has a carbon footprint the size of Belgium. Okay. John Darsie. Okay. So what are you talking about? Go ahead. Go ahead Darsie.
John Darsie: (22:08)
So the E, the S and the G, they're grouped together, but they're very different in a lot of ways and when you look at it from a credit perspective, my understanding is that governance is probably the dominant factor when it comes to credit quality. How important is the G and how are the E and the S becoming more important in analysis and the way people are running their portfolios?
Andrew Steel: (22:35)
So, I mean, I think governance has always been recognized and analyzed in a lot of detail and it's not likely to decrease in importance. The way in which companies are run, the way in which operational practices are implemented, it's always going to be important, it's always going to be integral to the performance of any entity. Now, trying to balance that with achieving environmental social goals is perhaps a lot harder to do. And you were talking earlier about the sort of green washing and the social washing and ultimately it's easy to say what you're going to do when it comes to environmental and social aspects, but actually the hard implementation of that and the measurement of the impact of that is much more difficult to achieve. And if we're being candid about it, we've had a huge amount of statements from both entities and governments around the world about achieving net zero but very little detail about exactly how they're going to do that.
Andrew Steel: (23:44)
And one of reasons why ESG relevant scores, which remember that pure credit component, one of the reasons why those show governance as the most dominant factor impacting credit profiles is because in a lot of sectors and a lot of jurisdictions around the world, environmental issues just don't bite in terms of credit profiles. You're seeing. A good example would be electric utilities in Europe. You do see it biting and you see it biting because of carbon pricing and de-carbonization requirements, requirements to shut down coal fire plants. And that has a clear and obvious impact on credit profiles. Even if you compare Europe with the US, you see much lower impact in the US. You compare the US with Asia, you see even lower impact in a lot of Asian economies. And so a lot of this gets driven by a very complex equation. It gets driven by clarity around the path to net zero or decarbonization targets. If you're an entity in a sector, which is going to decarbonize at some point between now and 2050, if you make your product twice as expensive as the next person 10 years before you're required to do that under whatever pathway the government has determined, there is a strong chance that you'll actually damage your business by doing that.
Andrew Steel: (25:12)
And so it's a very difficult and complex equation and at the moment, I think a lot of politicians have got the issue and I think, I can kind of wax lyrical about this for a long time, but I think the biggest issue is we over-consume. Around the globe, everybody over-consumes. And ultimately the only way that all of this works is that everybody gives up a lot of the things that they take for granted or that they see as luxuries. Things like bread, meat should become much less affordable. Travel will become very elite. And if you think about that from a politician's perspective, if I make the decision to say, well, actually only the very wealthiest people can take a foreign holiday because air fares are gonna increase exponentially, I'm likely to get voted out by the populace.
Andrew Steel: (26:01)
So there's this very difficult balance going on. And there was a lot of rhetoric initially around saying you can have your cake and eat it too. But I think John, probably your generation are maybe starting to recognize a little bit more that that isn't the case. And certainly I see my daughters buying secondhand clothes rather because they'd rather do that to be environmentally friendly than buy newer, cheaper off the shelf stuff from department stores. So it's kind of interesting-
Anthony Scaramucci: (26:34)
Trust me Andrew, John is buying secondhand clothes. Okay. Trust me on that. Okay. Just want to make sure you know. Go ahead Darsie.
Andrew Steel: (26:40)
I didn't like to come in, but.
Anthony Scaramucci: (26:43)
It's obvious. It's obvious.
John Darsie: (26:45)
Well, I mean, as it relates to food, it's certainly a trend that we are invested in ourselves on the asset management side of our business is there's GMO, the idea of genetically modified food is sort of a dirty word, but you have all these companies now that are using programmable biology basically to create different synthetic foods that imitate and meats that provide certain nutrients that you'd get naturally from food and proteins in particular. And there's a lot of companies doing really exciting things in the space that I think are getting increasing attention from ESG minded sovereign wealth funds and other asset owners who are looking for alternatives to... You can only farm so much land on the planet to produce the type of red meat that we need to feed a more affluent population. So it's certainly a fascinating time.
Andrew Steel: (27:32)
And arguably government should be directing more funds towards that type of innovation than towards trying to sustain unsustainable practices. But of course there's huge amount of lobbying and there's a lot of money involved and you see that everywhere around the world. It's not unique to any one particular country. I don't think so.
John Darsie: (27:54)
Yep. It's one way that capitalism, obviously we think is the best system. It's the worst system except for all the rest. But it's the best system, but it also has its flaws as it relates to special interests and the way capital flows. When you talk about longer term climate risks, how do those factor into credit ratings? Is it a factor related to regulation as you were talking about in Europe and other places where there's more restrictions being put on energy producers and things like that? Is greater weight placed on near-term risks or how do you think about sort of the different spectrum of short-term to long-term climate risks and how it affects credit ratings?
Andrew Steel: (28:33)
Sure. I mean, it's a good question and it very much relates as well to unfold back into one that was mentioned earlier about regulation and regulation not only around ESG factors, but regulation of ourselves on our credit ratings business side. I guess the regulated activities on the credit rating side that we perform, they're all subject to back testing, default testing in order to be consistent and accurate over time. And therefore they tend to be based on shorter term forecasts. So typically a credit rating forecast is that sort of three to five years for a corporate and the analysts look at that and they'll track and monitor on a rolling basis. So it'll get reviewed at least annually. And so it's a relatively short horizon in terms of a financial forecast when you're thinking about something like climate change. And again, that's one of the reasons why within the credit ratings, you don't see a huge impact, but accurately predicting the impact of these longer term effects without knowing what the policies are going to be and the timeframe for policy implementation is almost impossible.
Andrew Steel: (29:44)
So what we... But it's a great question and it's one that we had a lot of investors asking us after we produced this credit portion. They said, well, that's fine. That tells us what's within your credit ratings and it is forward-looking, that's nice, but ultimately, should I be still investing in coal bonds in China in five years time or does China look like Europe in five years time? And so what we started to do is we started to do some scenario based analysis because we said, look, in the short term, there are too many different uncertainties to be able to predict what the impact will be now of something that's going to occur in 20 years time. But we can look at the pathways that take us there and we can look at what we think will be the influences based on what we've seen previously and what we understand will be the situation going forward.
Andrew Steel: (30:38)
And so we picked the UNPRI's inevitable policy response scenario. That maybe won't surprise you because if you remember what I was talking about before is that policy action and timeframe from governments very much determines how costs crystallize in different industry sectors when you're actually forced to do something so that you don't get fined or penalized or your product becomes redundant or you don't meet the standards anymore required to sell into a market. And that scenario that we worked on with you, NPR and pivot economics is very much looking at how that occurs in different countries all the way around the world through to 2050. So we took that and we've started developing what we call vulnerability schools, which is looking at five-year time periods from 2025 through to 2050. And for those, marking how the risk exposure to environmental regulation changes over that time and under different sectors.
Andrew Steel: (31:36)
And what you see immediately is you see, for instance, that in places like China and India, where there's heavy reliance on coal for electricity generation, you see that the credit risk profile of entities in those jurisdictions doesn't reach the same level as we currently see in Europe until somewhere around 2035, 2037. And that's actually quite important if you're an investor. Here's what it tells you is that's a market that will transition, but isn't doing it now. It's an earlier stage. You can look at a market that's gone to a later stage and you can think about, okay, maybe I can get a better return from investing in coal and not just excluding it completely. And maybe what I can do is I can actually support the transition because I can [inaudible 00:32:21] terms and conditions around my investment that ensure that that transition part is met or it's locked to certain aspects of it are locked in. And so there's kind of a double opportunity to do good and do well from that.
John Darsie: (32:34)
Right. Could you see a future and how far away is that future we're potentially all bonds or green or sustainable bonds? And is there still going to be a place in the world in 10, 20 years for non green bonds?
Andrew Steel: (32:49)
Yeah. It's an interesting question which are kind of turn around because I think ultimately, you won't need to label things green or sustainable because investors will want to know about those aspects of the risk for everything. And so I kind of view it that we at the moment, we've got a big sort of momentum behind green bonds, blue bonds, social bonds, sustainability linked bonds. And I think that's starting to drive the early stages, but as the integration of ESG analysis becomes more embedded in investment processes, the need to do that will decline, but the requirement to have the information to demonstrate that will increase. And so you may see some green and social bonds in the future, but there'll be very, very specifically targeted instruments and for the majority of the other instruments, what you'll see is not a pricing benefit for labeling yourself green or social, but what you'll see is a liquidity penalty if you're not able to demonstrate your credentials. So fewer and fewer investors over time will want to invest in something where they can't assess that subcategory of risks.
Andrew Steel: (34:05)
And so I kind of agree with your premise, but I think the way it will evolve will be different. I think we'll see a surge in labeling then a fall off in labeling, but the fall off won't be because people aren't interested in the labels, it will be because it's just part of the everyday investment work. So a conventional bond will be expected to have certain characteristics. In terms of timeframe, wow, if I can guess that, I'll be a very rich man. I suspect it's going to take longer than people anticipate. So I think you're looking at, on the integration side, that standardization and harmonization of data is very, very important. I think you're probably looking at at least eight to 10 years from now until we see that becoming much more of the norm.
John Darsie: (34:54)
Right? When you look at industry trends like electric vehicles, obviously Tesla is the poster child for that, but you see a proliferation of electric vehicle manufacturers in China and the US and Europe. Renewable energy, there's obviously a huge focus there. How much is ESG and ESG standards related to credit ratings and investments driving those trends? Is it more of a consumer trend? How do you look at why those trends are so explosive right now? And also how does ESG investment principles feed into sort of the commodity super cycle? Do they stimulate it? Do they deter that market? How do you look at that?
Andrew Steel: (35:34)
Sure. We definitely look at, and we've produced research on things like the cost of decarbonizing sectors such as, or manufacturing processes such as steel, cement, fertilizers. And we've looked at what that means for companies in those sectors and also companies in different countries. So for instance, when we look at something like steel, you see that the US has a much higher proportion of arc furnaces for steel already, which are largely electric based. And that actually puts them in a much better cost position for de-carbonization going forward because the cost of changing the manufacturing process is far less. And so we do a lot of work around that and we think about how that impacts commodity pricing. We work with an entity called CIU very closely. We have a partnership with them where we look at commodity impacts over time. So we do spend a lot of time thinking about that. Can you just remind me the first part of your question? Sorry.
John Darsie: (36:39)
Yeah. Just about how much ESG factors related to investment decisions is driving this proliferation of electric vehicle companies and renewable energy companies that are seeing just massive waves of investment. Again, Tesla [crosstalk 00:36:56]
Andrew Steel: (36:56)
I mean, it's interesting. I think a lot of that gets driven by politics and political statements and that undoubtedly results in what you're talking about, which is a rush to invest in this stuff. It's seen as being up coming. You kind of need to get on the bandwagon to be in there towards the beginning. A lot of people connect to some of the sort of tech bubble that occurred where some aspects of the tech bubble back in the late 1990s proved to be very lucrative and very good as investments, but an awful lot of them really didn't perform well over the long term, but everybody felt they needed to invest in it at the time. There is a danger we go that way. And I think your example of electric vehicles is a really good one, because there's a huge amount of momentum for changing vehicle fleets in countries to all electric, but the infrastructure is just not there to support it and it really won't be there for quite a long time. And you're talking about a massive infrastructure spend for people to be able to travel in a similar way to how they travel with combustion engines.
Andrew Steel: (38:11)
And if you start to think about the logistics of that, then actually, if you can solve the hydrogen production cost, then the infrastructure that exists already is very easily adaptable to compress hydrogen. And so you would think spending a lot more money on hydrogen fuel cell development where the only byproduct is water, where you can refuel quickly is likely to be a much bigger long-term benefit. But of course, if you're a politician, you can't show short-term gains. You can't say, oh, we've, we've banned electric vehicle or we've banned combustion engine vehicles by 2030. I mean, that's all very well, but if you've no charging infrastructure and in the UK where we've got tiny proportion of electric vehicles and we're already seeing a lot of people experiencing problems in not being able to charge their vehicles or failing to get to their destination, because the weather is cold than they expected and so the battery range is lower. So there's lots and lots of problems. And I think it's unfortunate. It is progress, but again, it's not a long-term strategically thought-out plan and that really is where we need to spend more time. Certainly we will be at COP26 this year in November in Glasgow in the UK and we'll very much be pushing for people to think more strategically and long-term about this stuff.
John Darsie: (39:39)
All right. Amen. The last question I want to ask you is sort of a meta question around ESG. There's a lot of people that are very enthusiastic about ESG. There's a lot of people that shake their head and say that it's just executives paying lip service because it's something they have to talk about now because of pressure from asset owners. How much are we really building towards something that's going to have an impact on the planet, that's going to have an impact on the social situation in various countries around the world? And to what extent do you think true ESG investment principles are going to dictate who gets money in 2021, 2022, 2023 and who doesn't get the money?
Andrew Steel: (40:21)
Yeah, I think there's already some evidence to show that it is affecting the flow of funds. The slightly unfortunate thing is there still a surplus liquidity globally, despite going through the financial crisis. And so if you look at, we saw a great example a couple of years ago where a lot of traditional bank lenders were pulling out of lending to coal projects in Australia. And I think they thought this is going to make a difference. Kind of help to force a transition. And all that happened was a range of Asian and mainly Chinese bank stepped in to do the lending instead. And so, it's going to be difficult. There are going to be problems and issues along the way.
Andrew Steel: (41:11)
Unfortunately, and I suspect this may be what you're angling towards with this John is that we seem to still be at an early stage of exerting any real sort of influence and to still be at an early stage after what is now several years of talk to bait, target setting, lots of grandstanding and still not seeing much in terms of carbon reduction overall or nothing like the pathways that were being talked about 5, 10 years ago, really isn't good news. And what it means is that problem is being stored up and the timeframe to solve it in is starting to shrink. And from a credit perspective, this is our biggest single concern over the long run is we think that the less action that's taken now, the more extreme action needs to be taken in a shorter timeframe. And companies generally, and institutions, are good at adapting to change that's flagged in advance because they can work out that position, they can work out the impact, they know when that's going to happen.
Andrew Steel: (42:22)
But as that timeframe shrinks and the action that needs to be taking grows in severity, it becomes much harder and you're going to get a lot more shocks that occur if that happens. And from a credit perspective, that's bad news because companies struggle to react to big changes in short timeframes. We've seen a little bit of that with things like sugar tax in position in Europe to do with carbonated soft drinks, for instance, after a public outcry obesity. But that sort of thing I think is just the beginning of it. So I would like to be able to say yes, it's making a huge impact to make a really big difference. I think it's started. It's helping to change mindsets, but the practical reality is there is some change, but nothing like what needs to be done to meet these agendas that have been put out there.
John Darsie: (43:12)
We have a friend named Ketan Patel. He works at a firm called Greater Pacific Capital in London. He's working with the UN on a project called capital as a force for good where they're studying the volume of investment that's going to need to go green and go into these sort of UN sustainable development goals to really achieve the outcomes that we need. And that's numbers in the tens of trillions at this point. So hopefully people like yourself who are educating people around the realities of ESG can be a part of that and we're hopeful. But Andrew, it's been a pleasure to have you on. We hope to see you sometime in person when we're able to get back over to London or when you're able to get over here back to see your team in New York. But thanks so much for joining us.
Andrew Steel: (43:57)
Thanks John. Thanks Anthony.
Anthony Scaramucci: (44:00)
Super insightful stuff Andrew. Thank you again.
John Darsie: (44:04)
And thank you everybody for tuning into today's SALT Talk with Andrew Steel of Fitch. Again, please spread the word about these types of SALT Talks. We think these are really important ambitious goals that we need to get the planet and to get the global society where we want it. But we think education around these topics will help us get there. So please spread the word. Now, just a reminder, if you missed any part of this talk or any of our previous SALT talks, you can access them on our website on demand at salt.org/talks or on our YouTube channel, which is called SALTTube. We're also on social media. Twitter is where we're most active @SALTConference, but we're also on LinkedIn, Instagram and Facebook as well. And on behalf of Anthony and the entire SALT team, this is John Darsie, signing off from SALT Talks for today. We hope to see you back here again soon.