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Peter Cox, Risk and ESG Analytics Manager at Northern Trust, discusses ESG education for finance professionals, how to improve ESG data collection and the effectiveness of the growing number of green and sustainable regulations and disclosures.
Welcome to the Sustainable Finance Guernsey podcast page.
Guernsey Finance is a joint government and industry initiative tasked with promoting and connecting Guernsey as a leading international finance centre.
Named as one of the Green Finance Guide's top 10 must-listen sustainable finance podcasts, our broadcasts feature news, insights and discussion about green and sustainable finance, and the contribution which Guernsey, as a global leader in green finance, is making in this space.
Rosie 0:06
Hello and welcome to the latest Guernsey Green Finance podcast which is rated one of the top 10 most useful sustainable finance podcasts by green finance guide. Guernsey is one of the jurisdictions leading the way in green and sustainable finance. And as part of this podcast series we'll be speaking to and learning from some of the leading global figures in the field. My name is Rosie Allsop I'm head of Communications at WE ARE GUERNSEY, the promotional agency for Guernsey's finance industry. Today, I am delighted to be speaking to Pete Cox. He's the ESG analytics manager at Northern trust, especially as northern trust is particularly prominent in Guernsey supporting a number of managers and institutional investors with sustainable investment goals. Northern trust also provides services to one of our guaranteed green funds, which is the world's first regulated Green Fund regime. So welcome, Pete, I'd like to have you introduce yourself a little bit to our listeners. Can you tell me how you ended up working in this area of green finance and a little bit of your backstory, please?
Pete 1:18
Certainly. Good morning, Rosie. Delighted to be here. So from my personal history, I started working in investment analytics around 20 years ago, focusing on investment performance measurement and market risk analytics. And over that time, probably around 2013/2014 began to see from a client base growing interest in understanding elements of ESG exposures as a broad term. So beginning with what we see is kind of entry points for negative screening. So do not invest rules in certain business involvement sectors or categories. And that kind of base view of carbon footprinting, which has been around for a while. And since then, you know, that growing interest has grown much more to a point a few years ago, where, you know, broader acceptance, and data complexity have moved on significantly. And that's led to a whole range of ESG focused solutions being required by clients and that's where my role has evolved. And I've become, I've been lucky enough to help develop here at Northern Trust a range of solutions to help our clients in this space.
Rosie 2:27
That's great. Thank you. Now, I've also seen you've completed several ESG and sustainability educational courses. What are your thoughts on the education landscape with sustainable finance? Do you think finance professionals need to upskill in this area?
Pete 2:44
I believe so yes. So I've been lucky enough to study for a few qualifications. It's been one of my lockdown successes, or probably my only lockdown success. But over the past few years, you know, ESG, and sustainability more broadly, shifted from niche subjects, where there was a few specialists who, who knew things ins and in and out, but these have become more mainstream, more integrated. So it's reached a point now, where those involved in many types of finance roles should make sure they understand the new types of green finance, new products available, new security types, as well as the increasing range of regulatory initiatives that are impacting investors. So I think that move from, you know, specialist ESG, skillsets, is still valuable in many types of roles. But it has to be a case of upskilling for those who don't necessarily focus on it, in particular, because it will have an impact on them.
Rosie 3:46
Yeah, for sure. Now, your role is ESG Analytics Manager at Northern trust. Can you outline for me what this looks like in practice and how you best support clients with their data and their reporting needs?
Pete 4:00
Yeah, absolutely. So within our investment analytics group, I have responsibility for building and evolving a range of post trade solutions for institutional investors and investment managers who require oversight and monitoring across a whole range of ESG factors to support their risk management processes, investment decisions, and increasingly their disclosure requirements to regulators or interested stakeholders. In practice, clients tend to either have evolved their ESG policies to a large degree already, or sustainability programs in place already, in which case they look for data solutions or advanced platform access, because they have in house resources, they have knowledge, they have experience, they want to have the tools available to them to support their internal processes. On the other side, there are those being driven by these increased range of regulatory changes such as those focusing on climate, such as the TCFD, the taskforce gone climate related financial disclosures, which is being brought into a mandatory phase from what was a voluntary phase for a few years, or requirements introduced as part of the EU sustainable finance action plan as well. So at Northern trust, we've introduced our ESG insights product line that offers periodic reporting solutions using a combination of leading market data and our own proprietary reporting applications, to solve for some of those variety of use cases that those client types have to show ESG and climate performance over time relative to benchmark to provide those insights that can be fed into some of those internal uses or external disclosures.
Rosie 5:45
It's interesting you say that an emerging issue that we've seen in the green and sustainable space is the lack of data, and in particular, a lack of good quality data. So it is really interesting to hear about your role in this regard. Pete, can you tell me how we can improve both data collection process and data quality?
Pete 6:06
I can try, data coverage and data quality does remain a key concern for many. I think it's come an awful long way in the past few years. But it's still probably the number one topic of conversation that we have with our clients, where there's confusion around who can supply what, what they supply, and how data supply from different providers is similar or completely different. So that rapid evolution with the entrance of new FinTech providers in the ESG data market, and consolidation among a number of the others that have been specialists in this area for long time, has improved things, but continued criticism, like I say remains in terms of the different research processes, approaches adopted and the methodologies employed. So the uncertainty and lack of transparency does remain in many cases. One such example of that relates to measuring carbon emissions, which is a core focus for many, especially right now, where data coverage for public companies is pretty strong overall, but not so much for scope 3 emissions, for example, which can lead to large gaps when looking at a portfolio or fund view. Or there may be a use of estimated data from different providers that has its own pros and cons in terms of whether it's valuable to include that rather than leave blank in some cases. But there are many different solutions out there without there being a single perfect Golden Record for everyone to follow right now. So we'll see how these evolve and whether there's some consensus is reached in terms of best practice. But it's not immediately obvious right now, which type of framework or which type of path is going to win out amongst a range that are there today?
Rosie 7:53
And it may well seem that, you know, one size doesn't fit all, I guess. However, once we've managed to gather all this great quality data, how do you think companies can make sure they're adequately reporting on it? What are investors and managers looking for in their reporting?
Pete 8:10
Yeah, so investors are increasingly looking for portfolio oversight tools. So not necessarily at the individual security level, but more rolling up for their view of a total book of assets or investments. That includes a mixture of ESG data types, such as scores or ratings, indicators, flags, or more detailed kind of quantitative metric measures as well. So certain metrics are increasingly common, such as carbon intensity in the carbon emissions focus, particularly with the increased focus around climate risk and climate information disclosures that are coming hand in hand with that. Both investors and therefore managers, as a result are looking to disclose a range of indicators and metrics that provide stakeholders with some transparency into ESG performance. So there's obviously a lot of claims from managers and funds that are run against particular ESG goals or objectives. But obviously, there's now more of a push to improve the disclosure, improve the transparency, include a lot of this information up front for investors to see both before they invest and once they've invested, how they can track that over time. So, if some investors will have implemented particular investment policy guidelines, they need to monitor so they might be including more ESG focused rules now that says to their managers, you know, do not invest in these particular business involvement areas and it may be you know, do not invest in stocks or companies that have ratings below a particular threshold that they feel comfortable with. So managers are being led by some of these new policy guidelines that are coming in from the investor side. And they need to find ways of countering accusations of greenwashing and self disclosure bias at the same time. So that increased transparency is is really key here. And, you know, there's a whole range of data that can be delivered to support that. I guess it often depends on what the how the funds or managers are running their particular investments to to understand what type of data is needed in many cases.
Rosie 10:25
Okay, that's a good point. Now, you may be aware, we recently held our annual Sustainable Finance Week, which explored keys sustainable finance developments in some of the core financial services, industries of private equity, private wealth, family offices and the insurance industry. Many of the speakers at that event agreed that regulations and policy are important for institutional investors. Pete, what are your views on how different types of investors and managers are considering upcoming regulations? Do you think it's a business risk to companies for them to comply with upcoming mandatory reporting?
Pete 11:04
I think the regulatory increase in the picture globally is changing pretty rapidly. And this is presenting a number of challenges. I think, particularly in Europe, where the US sustainable finance action plan is bringing in requirements for managers in particularly to, you know, increase their disclosures conform to a set of standards, a new set of standards that's being introduced, we're hearing a fair amount of confusion. And, in some cases, pushback on the particular details of those regulations. And, you know, these aren't the first regulations where this has taken place. But it's certainly the case that where there's a level of uncertainty and how to solve exactly what is required. So, you know, the impact of that will be that fund managers will need to spend considerable time and resources in working out what they need to do, and then how they deliver that. So there's been quite a bit of pushback on the SFDR requirements. For example, I know the timelines on that particular set of requirements has has been delayed fairly recently into next year. But even though there's some confusion, still, there are examples of investors already adding compliance criteria to their RFPs or selection criteria for managers. So it's a bit of an interesting scenario where managers don't know exactly what to solve for institutional investors are looking to add these additional screens as part of their selection criteria. So who can who can best solve for that to meet the requirements that are coming in? it's changing pretty quickly on that side. But where investors or managers have ESG data sources and expertise in house, they're likely to be able to support disclosure leads more easily. If they don't, if their particular investment policies aren't led from an ESG perspective, they're much more likely to outsource to service providers, such as Northern Trust to have solutions to solve for them. So, you know, I think there's there's a whole range of approaches taking place right now. We see the regulatory picture, expanding globally as well into other regions so a little bit more wait and see, but the change is certainly coming.
Rosie 13:19
Yeah, watch this space. Do you think there's a risk that the momentum and the interest that's currently being shown in the green finance sector might be wasted? Because of this growing alphabet soup, and a lack of consistent requirements from stakeholders, such as lots of metrics to muddle through and several taxonomies being created, and that kind of thing. Do you think that growing number of regulations and taxonomies is a benefit or a hindrance?
Pete 13:47
I think it will eventually be a benefit. That being said into the picture becomes clearer and there becomes a fewer or smaller set of regulations of taxonomies to be followed. There's going to be some confusion in the meantime. So yes, I think that is certainly a consideration. You know, ESG is a very broad topic. And when clients approached me to talk about what how we can help them. I think the first conversation really has to hone into what exactly which area is being looked for, you know, where is it a regulatory piece? Is it an integration from an investment policy perspective? Is it just a monitoring perspective? So there's a lot of challenges as many, many different types of many use cases. Hopefully, some of the efforts that are going into these new regulations will mean that there's more of a global set in a relatively short period of time, we hoped. But until then, there's a lack of single set or that Golden Record to follow. Potentially there may be still regional variations and the Europe has been leading the way in this respect. We hope that with a picture of changing in North America and Asia as well, you know that the variations employed there aren't so different from what exists already that will be beneficial for everyone, I think. But there is a growing consensus for more clarity and collective attempts in the industry to prevent confusion, apply those consistency, those global standards in the future. So I think everyone wants to push the right way, everyone recognizes that let's not make it too confusing. But we just have to see how that's going to play out from a practical perspective.
Rosie 15:35
So we've just been discussing the momentum for green and sustainable finance in Europe. And you said, you know, it's leading the way, do you see the agenda in the United States or Asia, deferring much to Europe?
Pete 15:48
I think we could categorize them as being less focused on ESG, or climate green in particular. But there is definitely a growing focus in those regions. So, you know, for a long time, certain countries have been on a similar trajectory to to Europe. So Australia and New Zealand and Canada, just to call out a few are more advanced than some others in their regions in terms of ESG integration. So we can't always categorize completely by regions, I think there are hotspots of interest and more sophisticated processes taking place around the globe right now. But what we are seeing in the US, in particular, you know, the regulatory changes are expected. Now as part of the recent political shift we've had more client conversations there about our services, delivering analytics for increased oversight, especially to global corporates, who may already be subject to UK or Europe based requirements in some degree for maybe some of their other pension plans, for example, that located in those regions so the increased adoption of the TCFD framework is another big driver. I think I mentioned before that, you know, introduced as a voluntary framework. I think the shift now, where individual countries or regimes are implementing that as a framework to be followed as a mandatory exercise by certain client types, such as UK pension funds, for example, is a recent change is another big driver. So that mandatory adoption by those local country regimes and the UN, PRI as well as a global framework means that those not currently in scope can see that it might well be coming soon. It's certainly on the horizon, and it's moving pretty rapidly in their direction. In Asia, they're competing attempts to become green finance hubs and attract new capital, so things are moving pretty quickly there as well. Reporting and disclosure requirements are likely to expand from from where they are today.
Rosie 17:59
It's really interesting. Now, on to our final question already, I can't believe this has gone so fast. As we look to the near future, the world seems focused on cop and specifically themes around net zero reduction of carbon and so on. What do you see as the most prevalent themes within ESG? and investing? And how might take change in the future? is a big question.
Pete 18:24
It is a big question. Well, I think climate is certainly the hot topic at the moment. So I think we're all aware of that from both financial exposure perspective for investors and those broader societal goals being aim for the current netzero initiatives, decarbonisation, the momentum there is extraordinary, I think, in all regions, you know, that probably began with the some of the outcomes from the Paris COP, an increasingly now with the focus around the upcoming connections that are being made at the end of this year. So, you know, from a financial risk and opportunity perspective, there are regular reminders of more social and governance factors as well as climate peace, or indicators that highlight why they shouldn't be ignored, released. So, poor company governance scores have been linked with increased downside risk in a number of case studies and incidences of poor social standards or social social justice campaigns, companies on the wrong side of those policies or processes, can be harmed reputation, and on the bottom line financially as well. So there's an awful lot of focus on not just climate, but it's certainly going to be continuing. I think if the current trajectory is anything to go by, what we see is that there's an increased number of fund products being introduced to flow because in and provide clients with that kind of impact investment perspective as well, which is probably the next step up from that type of just ESG performance understanding and targeted, proved alignment to the the UN's SDG framework as well. So those types of global goals are gaining momentum where they're structured Well, we think they're going to continue to gain prominence as to where exactly the future ESG focus is going to be, remains to be seen some work can't quite call that out. But certainly, many looking at many different aspects and climates just going to continue as a key piece of that.
Rosie 20:42
I think that's absolutely right, and thank you, Pete, for joining us today. Thanks for your time and for your insights. I'm very taken with what you said it will be very interesting to see how this all shakes down and you know, what is a very fast moving picture at the moment. I'd like to thank you also for tuning into the podcast today, we have quite a back catalogue of interviews and panel discussions on the Guernsey Green Finance podcast and you can check them out by searching for the Guernsey Green Finance wherever you get your podcasts. If you enjoyed today's episode, please leave us a review or comment. We always enjoy receiving feedback. You can also find us at guarantee greenfinance.org and weareguernsey.com and you can interact with us on Twitter at @GSYgreenfinance and @WEAREGUERNSEY, will also have links to Pete and Northern Trust's social media in our show notes. So check those out to hear more from them. And you can also watch our Sustainable Finance Week on demand. It's over on our website and is presented in association with the United Nations Financial Centres for Sustainability (FC4S). And we'll be back soon with another edition of the Guernsey Green Finance podcast.
Transcribed by https://otter.ai