by Stuart Large
Business Development Director

The frequency and severity of extreme weather events is increasing. If we consider the land mass in major countries and analyze the exposure to a climate peril such as flood, fire, heat, drought, or wind, we see 35% of this land mass being highly exposed and by 2030 that percentage will reach 40% and by 2050, 63%. As these numbers increase, regulators are proposing more stringent disclosures and companies are looking to improve their ESG and climate risk analysis.

For example, in March 2022, the SEC proposed new rules for climate change disclosures. While they are not yet final and are open for public comments, the SEC has proposed to advance rules that require disclosure of prospective risks and material impacts on the business, strategy and outlook caused by climate change, generally consistent with the Task Force on Climate-Related Financial Disclosures (TCFD) disclosures among many others.

Let’s take a look at how some companies are looking at ESG and the intersection of climate related risks.

During my panel discussion at the Energy Risk Conference in November, 2022, I was honored to be joined by Christian DeSantis, Chief Financial Officer at Vargronn (ENI), Jo Richardson, Head of Portfolio Strategy at a non-profit called The Anthropocene Fixed Income Institute, Florent Pele, Cross commodity strategist at Societe Generale and Navin Rauniar, Co-chair ESG working group & UK Steering Committee member at Professional Risk Managers’ International Association and Advisory Partner at TATA Consulting.

Each member of this expert panel shared information about their ESG journey, thoughts on how to move the climate change and ESG needle and actions companies can take to build a more resilient future.

ESG is an opportunity all companies must embrace

So how do you go about building a sustainability program and what are the trends?

Christian DeSantis, Chief Financial Officer at Vargronn (ENI) points out that his company first acknowledged that the ESG landscape is very dynamic right now and that having a clear analysis of the company and identifying key stakeholders (such as owners, external organizations, sustainability and CFO departments) is important before setting clear objectives and KPIs. Once those areas are established and the program is underway, ESG reporting criteria becomes important. It is critical to have involvement of all people across the organization and systems in place as well as a budget to meet the goals. Systems for collecting the data are extremely critical as manual processes for this could be detrimental to reporting accuracy and the company.

Fixed income markets can drive climate change resiliency

Jo Richardson, who represents a non-profit called Anthropocene Fixed Income Institute which empowers fixed income investors to improve the environmental sustainability of their investments, believes bond markets have the ability to finance climate change transition and the path to resiliency.

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“Of the 100 top emitters, responsible for 75% of GHG emissions, only 30 are listed on the stock market. The fixed income market has enormous power and can influence governments and organizations to act.”—Jo Richardson, Anthropocene Fixed Income Institute

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Today there are green alternatives and sustainability-linked bonds that provide a coupon step depending on the KPI, which is designed by the issuer as sustainability becomes an input into credit decisions. How fixed income investors think about the impact of climate on their portfolios varies by region. Europe is relatively focused on making capital available to sustainable companies, whereas, in North America, we see more focus on risk mitigation and resiliency of portfolios. This is particularly important for debt investors. Typically we’ve seen less focus on debt as a means to making a portfolio impactful, because of the different styles of investment, with bonds being more about preserving value than creating it. Climate risk is investment risk, and so needs to be taken into consideration in all investment decisions.

Florent Pele has been working with Société Générale for 6 years and is now in charge of ESG analysis applied to commodity future contracts. Pele honed in on Generale’s work in creating an innovative and comprehensive ESG rating framework for all commodities futures included in the BCOM index.

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“In no way do we claim that commodities are clean or particularly ESG-friendly. To be clear, commodities are not clean in general – they pollute, which poses a significant challenge to thinking about them in an ESG framework. However, ignoring commodities in an ESG context does not solve the problem. Commodities are at the root of ESG challenges, but also at the root of our society, which is the very reason why they warrant our close attention.”

—Florent Pele, Société Générale

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Pele shared how Generale explores the mostly negative environmental and social impacts of producing commodities and scale it against the potential positive impact of their utilization. For example, the energy complex is of course one of the worst commodities sectors due to the GHG emissions during utilization, but soft commodities (cotton, cocoa or coffee) also have bad ESG scores due to social issues along the production chain. Gold is also one of the worst commodities due to high GHG emissions and seepage of toxic waste especially in illegal mining operations. The ESG scores displayed are attached to a commodity futures contract. So how can investing in commodity future contracts impact the underlying production and consumption industries? Being long (or with more allocation to) the well ESG-rated commodities and short (or with less/no allocation to) the badly ESG-rated commodities could have unwanted effects on the physical market if ESG-driven investor flows become large enough to move prices.

Navin Rauniar is an Advisory Partner at TATA Consulting. Navin made a number of contributions to the conversation, offering thoughts on the value of climate risk analytics and how this can be integrated with the services provided by Tata Consulting as well as useful input on commodity ESG ratings. A point Navin was keen to emphasize is that action is also required at the sovereign level, providing a framework business can align with.

There is a definite convergence between ESG and climate risk reporting requirements and the newly proposed disclosures by the SEC, broadly aligned with the Task Force on Climate Related Financial Disclosures (TCFD), show us that companies must quickly transition to investor-grade reporting by accelerating climate change reporting processes.

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To learn more about the intersection of ESG and Climate Risk Analysis, contact us or request a demo.

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Stuart Large is the Business Development Director at Jupiter.

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Jupiter Intelligence is the global leader in climate analytics for resilience and risk management. For further information, please contact us at info@jupiterintel.com.

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