MASTERCLASS: How Deeper Data Impacts ESG Investing - January 2021

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  • 50 mins 20 secs
As access to ESG data, scores, and evaluations continues to improve, what do sustainable investors need to know as they evaluate the growing array of ESG solutions – including indices – to make more informed decisions when building purpose-built portfolios?

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S&P Dow Jones Indices

How Deeper Data Impacts ESG Investing Masterclass

Jenna Dagenhart: Hello, you're watching an exclusive S&P Dow Jones Indices Masterclass focused on ESG. Sustainable investors are looking to bring about change, not only through investment choices, but also by holding companies accountable, driving broader awareness, and encouraging people to participate in the ESG space. With increasing access to data, scores, and evaluations what do market participants need to know about the array of ESG solutions available, including indices, and the importance of understanding the data that drives them.

Jaspreet, setting the scene here, why are we seeing sustained interest in ESG investing?

Jaspreet Duhra: Yeah, thanks. So, the momentum has been with ESG investing now for very many years. And it's great to see that even in this year where we've had global challenges, such as a pandemic, that interest has been sustained. And there's many reasons for this, and I'll touch on a few now. So, firstly it's increasingly becoming mainstream for investors to see the value of incorporating ESG data into their investment processes. We're seeing there is increasing evidence that over the long-term companies are managing their ESG risks and opportunities well, are likely to outperform. It's also a really valuable tool from a risk management perspective as well. What we've also seen over the last few years is that there is increasingly good, consistent, verified data being released from companies. 

And this also makes it much more likely for investors to consider this information as part of their investment processes. Another important consideration also is that we're seeing more regulation in the area of ESG investing. So, particularly coming out of Europe we're seeing that there are more and more requirements for companies and investors to disclose how they're integrating ESG into their investment processes, if they are at all. So, all of this is leading to this increased interest that we're seeing in ESG investing, and like I said what it's great to see is that that hasn't shifted during this year of 2020. In fact, we've seen that this has been an opportunity for ESG to shine a light on some perhaps under-reported issues. So, we're seeing more questions being asked of companies, particularly around the social side, which is really important. 

And it's also been great to see that perhaps one of the greatest ESG challenges that we have around climate change has also stayed on top of the agenda. We've seen some really important commitments from countries this year despite the huge health crisis that we're also trying to deal with. So, I'd say the momentum is very much with ESG investing, so much so that it's becoming increasingly part of mainstream vernacular. When you speak to people now, they know what climate change is, it's reported in the mainstream media, so I'd say this momentum is very much here to stay. 

Jenna Dagenhart: Andrew, can you talk to what we've seen in the last year or so regarding flows into ESG? 

Andrew Walsh: ESG flows into ETFs in Europe have been very strong, indeed, through 2020. And it really represents the strongest year of in-flows that we've seen in this space. Of the 100 billion dollars of in-flows that we've seen into ETFs in Europe this year, 40 billion of that has been specifically in the ESG screened ETFs. As regards to the UBS S&P 500 ESG ETF, that ETF alone has had 720 million dollars worth of influence this year, building on the 750 million that it raised last year. So, really, you're seeing a lot of investors looking at ESG as a replacement for the core type of exposures that they would've held previously. 

Jenna Dagenhart: Yeah, those numbers really speak for themselves. And how have ESG indices been performing in the last 12 months? 

Andrew Walsh: Well, that's very interesting because I think historically one's perspective might've been that if you invested ethically, that it typically would have to have some kind of under-performance somehow, that you had to bear some kind of a millstone around your neck to invest ethically. But what is very clear from all of the data coming in now, is that ESG screen portfolios have actually helped to mitigate draw-down risk. And that it's actually helping to deliver stronger performance compared to the respective parent indices upon which they're built. So, just for example on the S&P 500 ESG, that has outperformed its parent index considerably since it was launched in the beginning of 2019, but just since the beginning of 2020, the S&P 500 ESG has actually outperformed the parent index by 1.75%.  What is also interesting, during Covid downturn that 6 week period in Q1, you actually saw that the S&P 500 ESG delivered 78 basis points of out-performance against the parent index. Clearly there is a lot of value in there in defence aspect. 

Jenna Dagenhart: Debunking that myth that you have to sacrifice performance in order to invest ethically. 

Andrew Walsh: Exactly right. 

Jenna Dagenhart: Manjit, Andrew talked about the growth of ESG this year. What have we seen in terms of corporate engagement? 

Manjit Jus: So, what we're hearing is that companies now more than ever want to show their stakeholders, including their shareholders, that they are resilient, that they are looking ahead, and that they are committed to people, the environment, and society. And to playing their part in a post-pandemic world. And certainly, the increased interest from investors, the increased in-flows into sustainability-linked assets has also put additional pressure on companies to make sure that their sustainability stories are being told and heard loud and clear. 

Jenna Dagenhart: To quickly follow-up on that, what's been happening, and what's been driving this trend? 

Manjit Jus: Well, companies certainly see the need to show their stakeholders, their shareholders, their employees, the communities that they operate in, that they are responsible corporate citizens, that they look at things that are beyond just short-term profits. This is exceptionally important at times where companies are going through restructuring, it's uncertainty in the markets, it's financial turmoil at some organizations, and companies recognize that showing their employees and their key stakeholders that they are firmly committed to their sustainability targets is a way to get them out of this global crisis and to kind of give them hope that there is a way to actually improve their businesses and seize new opportunities rather than deal with a crisis in a way that has only negative impacts on their shareholders and on their employees, and local communities. 

Jenna Dagenhart: Jaspreet, what's the demand from clients to use ESG scores and EGS indices? 

Jaspreet Duhra: Yeah, so the demand is really very significant. So, broadly we've seen there's been a shift towards more passive investing, we're seeing this is a strategy that is getting increasingly more popular. When you pair this alongside, as I talked about earlier, this increasing interest that investors have in applying an ESG overlay, there is a really a significant demand for ESG indices. And in fact, when we look at the amount of assets that are in ESG ETFs, those assets doubled from 2019 to 2020. So, this is very much a trend that's here to stay. When we think particularly of ESG scores, we've actually been using them in our indices for over two decades. So, we launched a first=ever global sustainability benchmark back in 1999 using ESG scores on my partners at SAM, and that index is still going strong today. 

And we think that this is the directional flow, because there are so many different ways that you can use ESG scores within an index. So, one, you can use it to remove laggards, the very worst performing ESG scores. This is important for investors from a risk mitigation perspective, but also you have the added flexibility of being able to use the scores to identify leaders within their particular industries, the companies who might be well positioned to take advantage of opportunities coming as we're weaving towards a more sustainable world. And also, you don't have to necessarily use the score as a holistic outlook ESG score. We have the flexibility to pick out the pillar levels as well, so breaking down into environmental, social, and governance issues. 

So, for instance in our Paris-aligned indices, we focus on growing out the E section, the environmental score, which we want to emphasize, and then we have other indices such as our long-term value creation indices where we're particularly focusing on the governance score as well. So, we have added flexibility there. And as well as using the ESG score for constituent selection, we can also use it to weight constituents as well. So, if we wanted to create an index where we really wanted to emphasize the ESG score to drive the weight of companies within the index, we have got the flexibility there. So, given the fact that there is no other indicator quite like an aggregate ESG score, the fact it weighs up all these hundreds of different ESG issues, and provides us with a single score that we can use, I anticipate we'll be using these in our indices for a very long time to come. 

Jenna Dagenhart: What does the increased engagement that Manjit described mean for the indices? 

Jaspreet Duhra: Yeah, so I mean, it's really important. So, it's the backbone of what we do, the ESG score that we provide. And for us, it's really important that we can talk to the quality of the score. So, one thing for us is being able to explain how the ESG scores are constructed. So, what are the indicators that SAM are selecting to assess companies on, what are the weights they're applying to those scores and indices, and that's a really important part of our conversation. Then we also need to have a narrative talking to what makes the score high quality, what is the process that they're particularly following? And we place a great deal of emphasis on emphasizing the fact that SAM goes deeper. 

So, they're not just distantly collecting public information, the engagement piece is really important. It means that companies have this awareness of how SAM is collecting the data too, and we're finding that resonates really well with companies. In fact, so much so that back in 2019, SAM were awarded an award from an organization called Rate the Raters, and they were awarded as having the highest quality ESG rating as ascertained by sustainability professionals. And it's really important to us to have that narrative because sometimes there is a sense that as someone investing in a passive product, that perhaps you can't be as effective as engagement. And this completely helps us tell a story as to the process that SAM goes into helping move the darker companies. 

Jenna Dagenhart: Yeah. Speaking of engagement, what's the difference between company engagement, CSR, and public disclosure, for example? 

Jaspreet Duhra: Yes, there's lots of those acronyms that we use in the industry. So, CSR, corporate social responsibility. This is generally talking to activities that companies are doing to demonstrate that they are looking beyond their bottom line, that they are doing, say philanthropic activities for the broader world. They want to talk about these activities, they want people to know about them. When we're talking about ESG, environmental, social, and governance issues, this is much deeper, it's much broader, it's not necessarily issues that companies are reporting on. 

Say, for instance, you have a company that is an oil and gas company, it has fossil fuel reserves, it's decided to write down some of those assets because we know government policies are changing, we have seen examples of this happening. The reason the company's doing this is because it's reacting to an environmental risk. And so, there might be a nice trade-off that it is actually helping the environment and the wider world, but that's not the reason that that's driving that decision. So, this is a deeper level of analysis we're expecting of companies, and like I said it's not necessarily an area that they're reporting on. And then you get the area of issues that perhaps they are not even aware of the fact that this is an issue their investors are aware of. So, one example is that SAM collects data on cybersecurity and cyber risks, and so they may be aware of the fact that they have been hacked a number of times.

They don't want to disclose this information, but because SAM is engaging with them and saying, "Look, we can look at this information, we can aggregate it into a score so we're not going to release that raw number," it means that we have a richness to require our assessment that we wouldn't if we just relied on the public information. So, that's really important. And also, engagement when our industry is used as a term for investors who are directly engaging with companies as well. So, trying to affect some kind of change in behavior, or affect some kind of change in disclosure. So, all in all this is all good. It's good that companies now are participating in CSR activities, it's good that we and investors are engaging with companies all to encourage more and better public disclosure. 

Jenna Dagenhart: Andrew, anything you'd like to add about client engagement here? 

Andrew Walsh: I mean, I think this point that Jaspreet mentioned before is very important. There's probably a misconception out there that engagement with passive investing doesn't really exist. That's absolutely not the case. So, at UBS Asset Management we engage and involve in stewardship across the board for all of our holdings, whether they are held passively or actively. And I think this is a very important message for people to appreciate. 

Jenna Dagenhart: Manjit, as the data and scores provider for S&P Dow Jones Indices, how do you craft an ESG score, and can you tell us about this data? What's the difference between data and scores? 

Manjit Jus: That's a really good question, because the terms data and scores are often used interchangeably, and I think it's important to distinguish the differences between the two. We consider data to be the raw underlying information that companies provide us, and report. That's a lot of data that we're talking about. We collect up to 1,000 data points per company every year, that data is supplemented by hundreds of thousands of documents that we collect across companies as well. And so, a lot of context is needed to understand how that data is being reported. And quite a lot of expertise is needed to process that much ESG information that spans a whole range of topics.

So, for example it's important to understand what definitions are being used by the company? Is the data being reported for the whole company or only parts of the company? Has the completely changed the methodologies it uses to report this data year-on-year? So, is there a change in the underlying definitions that a company might use, which would make the comparability of data one year to the next difficult if you don't understand that. So, when we talk about scores, we're essentially talking about the aggregation of all this raw data into a numerical score, into something that is representative of how a company is doing on an ESG issue. The score can be used by a company to benchmark itself against its peers, or it can be used by an investor, or a financial analyst in the investment process in a model, because it's a quantitative number, or in fundamental research to figure out how a company is doing compared to its peers. 

So, a lot of analysis goes into cleaning up this data, contextualizing the data, and making it fit for use so that it can be transformed into a score that is useful to the end user. And the scores exist at various levels of granularity, so as Jas already pointed out there is a top-level score, which would be suitable for some investment processes. You can drill down to the underlying individual score; we have about 120 of those per company. Again, those are the representation of over 1,000 data points that are being aggregated together. And depending on the need, whether it's a thematic focused investment product that is looking at ESG issues, or whether you're looking at ESG more broadly there is the right level of granularity for that use case. 

Jaspreet Duhra: Yeah, thanks Manjit. And if I can just jump in and add it's really important that we understand the audience for these scores. And so, the level of knowledge that our partners and our clientele, when it comes to ESG, does vary. So, for some clients it's really great to have this aggregate ESG score. We can give them the assurance of the quality of that score, the deep expertise that Manjit just described, in putting together that score, they're comfortable going with that headline overall aggregate assessment. But then for some clients, they do want the detail. They want to be able to dig down into the details, it's really important we have these different layers of scores that we can provide to clients dependent on their use case and what they're trying to do with the scores. 

Jenna Dagenhart: Andrew, what do you see in terms of client knowledge, and what they're looking for? 

Andrew Walsh: It's really interesting. I think five years ago the questions typically were pretty high level. I mean, they were typically asking things about the negative screening, the are you removing the tobacco stocks, the typical sin stocks. But I have to say in the last 12 months especially, we've been getting more and more complex questions coming from clients. Naturally our clients are getting questions from their own end clients. People really want to understand more in-depth. I mean, yes, they want to know what the score is in terms of the ETF and the underlying index, which it's tracking. But they're really asking a lot of more in-depth questions specifically relating to carbon, but also relating to governance as well. 

They might want to look at a specific metric which sort of covers the governance side of things. Because as we know there's been many company blowups, by basically a lack of proper governance in place. VW is a good example of that. So, these are questions that are, again, getting a lot more complex from clients, and it's a very good sign. I mean, clients are clearly completely embracing the ESG type of a sort of methodology and mindset. 

Jenna Dagenhart: And more and more of a company's value is tied up in these intangibles. So, there's more on the line here than there was, say 30 years ago. 

Andrew Walsh: That's a very good point. I mean, if you think of when you look at a typical company's assets, I mean, I'm no balance sheet sort of person necessarily by background, but typically you would think of a big American conglomerate with a lot of factories, and that type of thing. But clearly the makeup of the S&P 500, now I think there's a stagnantly high number of the percentage of the value that is actually tied up in the intangible assets. So, that's very interesting. So, of course that naturally lends itself to a lot more questions about these more detailed types of points that the clients are asking related to ESG. 

Jenna Dagenhart: And Manjit, what makes these scores robust? 

Manjit Jus: Well, as Jas alluded to before, we have a research framework that we've been using for over 20 years that was really born out of the necessity to collect ESG information from companies at a time when there wasn't a lot of ESG reporting available in the public domain. So, essentially picking up the phone and calling companies and asking them very uncomfortable questions about what they were doing in terms of water, or carbon, and obviously ESG reporting has improved tremendously since then, and there is a lot of high-quality data available today. But we feel that the company needs to be part of that process. The company needs to be engaged on these ESG topics, because it's a two-way learning street. 

On one hand as a provider of ESG data, we're not credible if we kind of dictate what companies should be reporting  on their business models. They know their industry best. So, through this kind of engaged process that Jas described before, we get a lot of feedback from companies, but at the same time we're able to represent the views of the investment community on what the ESG topics are that are upcoming, that there may not be global reporting standards for yet. They may be in development; companies may not be aware that these are issues that investors are concerned about. So, part of our approach and our research approach is to try to find a balanced way of assessing, not just how good companies are reporting on topics, or how much information there is on the topics they're reporting on today, but also what's their actual performance on these topics? 

So, are they actually doing a good job when it comes to health and safety metrics versus their peers? Or are they actually bringing down carbon intensities in a meaningful way? But also, have they started to think about the upcoming ESG issues that may not be so important for them today, but certainly will become either risks, or may present opportunities in the future? So, part of our research or approach in the corporate sustainability assessment we run has been to put these issues on corporate agendas and put them on the radar. These were things like tax transparency back in 2014. We added questions on fair wages a couple of years ago, which is another thing that a lot of people are talking about in context of the sustainable development goals but there isn't really data available. 

This year we added quite detailed questions around plastic waste, which is obviously something that a lot of investors are looking at. So, I think that's really kind of some of the key ingredients that make these scores robust. It goes beyond what's in the public domain, but really tries to score companies on performance, and also their awareness of upcoming ESG issues. 

Jenna Dagenhart: And you just mentioned a variety of different issues. Andrew, what kind of concerns are clients most interested in right now? Plastic, or fair wages? What are you hearing? 

Andrew Walsh: I have to say, across the different key metrics that are measured, I really do think that it's climate related at the moment, undoubtedly. I mean, all of the metrics are important, but there's clearly many, many questions that we're getting to relate to weighted average carbon intensity, the specific definitions relating to emissions, and want to understand really in detail about how these things are being measured. And of course, they want to understand, if they're investing in our ETF, they want to understand how these compare to other comparable ETFs out there which might have ESG screens. 

There's no question there's so many products out there in the market now, it does create a lot of complexity and confusion for investors. So, we are getting a lot of those types of questions. They really want to understand how these things differ, but specifically it really is the carbon metrics. Because remember, you've got specific issues, like they want to know the number, but the investment company themselves may have carbon targets they're trying to meet, across, say, all over the funds that they hold. So, they might say even if it's not in a dedicated ESG portfolio, they might have an overall target for the level of carbon intensity across all portfolios that they hold.

So, consider S&P 500 ESG, which is increasingly being used as a core replacement, this is part of the attraction to it. This is something that acts and looks a lot like the S&P 500, it has been delivering slightly better performance, but it can help to considerably reduce the company's overall carbon figures that they have across their entire portfolios. 

Jaspreet Duhra: Yeah, and if I can just jump in and add there, this is a trend that we also see. So, we've seen that there's folks on carbon, climate change, this is something that many investors are asking us about. And this is why early on, back in 2016, we acquired true cost, who are specialists in the provision of climate change data. And in fact, if you go to our website, SPDJI.com, what you'll see is that for all of our indices, whether ESG or not, we provide carbon metrics, we provide fossil fuel reserve exposure metrics as this is something that investors are interested in, whether the index is ESG or not. Whether it's a climate index or not. The requirement for this kind of reporting is really important. 

Jenna Dagenhart: And these are very complex issues, as you mentioned. Manjit, the data you're using is also complex and nuanced. How accessible is it for market participants, investors, fund managers, advisors, and retail investors? 

Manjit Jus: I think to Andrew's point, I think the landscape has changed substantially in recent times. So, you today have really the full spectrum of end-users of this type of information. From the very sophisticated larger, or smaller niche asset managers focused on ESG who have large teams with a lot of in-house expertise. To those financial institutions that are only really getting started on their ESG journey and may not have the resources, or the level of sophistication to dissect all of these scores and data points and come up with their own views. So, I think what we need to be able to do today is to cater to a very broad audience, and to be able to also help educate the end-users on how to become more sophisticated in their thinking around ESG. 

So, we have scores and data at various levels of granularity that suit different use cases, and different levels of understanding when it comes to ESG. We see more and more large financial institutions are creating their proprietary ESG scoring systems, so they themselves are becoming aggregators of ESG information, pulling in raw ESG data scores from a number of different providers, and forming their in-house view that is aligned with their own investment philosophies and those of their clients. We have thematic investors that may be very focused on subsets of ESG scores, or those investors that are looking to measure impact. So, real measurable impact of companies in their portfolios in terms of their progress against the sustainable development goals, or against climate targets. 

So, I think the key here is really to make sure that whoever is using this information have the really sound understanding of how these data points are being crafted, what the methodology is that it is going into collecting this information, how the scores are being created, and also ultimately creating communication channels so that they can engage with sector analysts, and ESG analysts to ask them about how these scores are crafted. And that is one thing, for example, the analysts in my team, we spend a lot of time with our colleagues from the index business, and clients, talking to them about individual data items and scores, and explaining to them how we are actually creating these scores. And I think that will increase in importance. 

Jenna Dagenhart: Building off of that and looking at the indices, Jaspreet, how are you using this as you construct indices? For example, the S&P 500 ESG that launched last year. Can you provide some specific company examples? 

Jaspreet Duhra: Yeah, sure. So, we launched a new ESG index series in 2019, which was aimed at investors who are looking to incorporate ESG into the core of their portfolio holdings. The objective of this particular index series is to offer benchmark-like returns, so trying to mirror as far as possible the broad market exposure of the parent index whilst also offering an enhanced ESG profile. And there's two ways we're using ESG scores in this particular index series. So, firstly we're looking at a global universe of companies, and we're sorting companies into their industry groups, and we're removing the bottom 25% of companies by ESG score. By doing this, we're ensuring that there's no ESG laggards within this particular index series. We don't want investors to have exposures to those companies in this index. 

There are still very many companies who are doing very little when it comes to ESG. The second way we're using the scores is that we are taking the eligible companies, so first we're applying a number of other exclusions based on business activity, also based on low UNG score. We then have our pool of eligible companies, we're then sorting them by their ESG score, again focusing on the industry group that they're in. And we are putting them into the index until we hit 75% of market capitalization of the parent index. So, really important keeping that same industry exposure, as I mentioned, to the parent index. 

And the use of the ESG score in these indices is really important. It is by far the largest reason for a company not to be included in the ESG index series. And there's several examples I can give you here, so back in ... When we did our rebalance in April 2019, we had a very high-profile exclusion. We removed Facebook from the index, and this was based on its poor ESG score. But what was interesting, what we saw a year later, is that the company had considerably improved its ESG performance. So, come the April 2020 rebalance, Facebook was again included in the index. In particular, we saw that it had really improved its governance score, its overall score improvement from 21 in 2019, increasing to 50 points in 2020. 

There's also another way we're using ESG data in this particular index series as well, which is a piece of ESG controversy research that SAM produces. So, on an ongoing basis, SAM is monitoring companies for any high profile ESG instants, covering things such as economic crime, or human rights abuses, environmental incidents. They're incorporating this research directly into the ESG score, which we use in our indices, but if there was a very high profile ESG incident during the course of the year, where it's showing that there is a systemic issue with a company, where there's been a serious financial implication, or reputation implication for that particular company, we have the right to remove that company from our index immediately. 

And one example was back in October 2019, Johnson & Johnson was removed for a number of controversies it was involved in. For instance, the Department of Justice in the U.S. were suspecting that some of the officials at that company were aware of carcinogenic use of products there. So, in that case we removed that company directly. So, a number of examples that we can provide of where ESG scores have had a real tangible effect on a company's involvement, as well as the ESG controversy piece as well. 

Jenna Dagenhart: Andrew, as someone that engages with the end investor, what do they need to know about the data scores and indices? And with access to the underlying scores, how deep do they need to go as they answer client queries? 

Andrew Walsh: As I kind of mentioned before, I mean, there really is an increased amount of depth that they're looking to understand now. So, there could be specific metrics that are very important to them, different clients have different sorts of views. Other clients are really happy with sort of a top-level assessment score, about what the overall fund score is. But others, I think a big thing that comes up is why is this specific company in this index? The S&P 500 ESG, it's got ESG in the title, why is this specific company included in here? So, that's where we get into these in-depth discussions. We might well even be discussing with the S&P teams there to get their information from them, but so that the end clients can be more comfortable with understanding why these specific companies are able to be included. 

Because the preconceptions about a company's, say, business involvement et cetera, might be one thing. But the reality could be something quite different. I mean, a good example would be something like McDonald had always had a bad reputation for ... You wouldn't think that that would be a company which would have a good ESG profile, but in fact it's actually got a pretty reasonable ESG profile. And it's important, therefore, that we can go back to the clients and reassure them as to why these specific companies have made it, with very specific data showing across those key metrics. So, why these types of companies have actually been ... They're basically not so bad. 

Jenna Dagenhart: At first glance they might have a few questions. 

Andrew Walsh: Absolutely. 

Jenna Dagenhart: And how are they interpreting it? 

Andrew Walsh: I think there's a lot of, "Oh wow, I didn't realize that." Or, "We hadn't realized that they sold out of that business," for example. And then the other way around, you've got other companies which might get caught up in the net due to some sort of involvement in a business area that people weren't even aware of. So, you could have something like the Australian company Amcor, which is a packaging company. But they, in some ways, could fall foul of tobacco because they make more than ... They make about 30 or so percent of their profits from making cigarette cartons. So, these types of things are kind of a revelation for clients when they try to understand why certain companies are included, but also why other ones have been ejected. Or basically didn't make it through the various screens that go on. 

Jenna Dagenhart: Would you say they're using it at the index? Or the company level? 

Andrew Walsh: I think the most companies want ... The most clients want to understand how it is across the index level. But I think there's undoubtedly more and more clients asking really deep-dive questions about specific companies. So, we're seeing more and more of that. So, the questions that are coming in are getting very plentiful, and more and more in-depth. 

Jenna Dagenhart: Manjit, so access to the data and scores powering the indices is critical, but why and how is the S&P global approach unique? And what's the value add? 

Manjit Jus: Well, ESG data is not only a complex, but also a rapidly evolving field. New regulations, reporting standards, and just increasing degrees of sophistication in how companies are trying to get across their sustainability stories means that there's a lot of information to stay on top of. And I think that's where we add a lot of value in terms of bringing that information together and trying to harmonize it in a way that makes it easy to digest and comparable. So, there is still a lot of criticism around ESG data, around it not being comparable between different standards. 

But it's also important to note that it's just changing so fast. Even companies themselves will restate information from previous years as they realize that their own internal control mechanisms and aggregation techniques become more sophisticated. So, it is this kind of rapidly shifting, moving target that is very difficult to navigate and requires quite a lot of resources and expertise to be able to master. So, I think that's where our 20 years of experience working in this area really has an impact. We understand the details of ESG information, our teams of analysts read the fine print in sustainability reports to understand the context in which ESG information is presented, we process hundreds of thousands of documents, millions of data points, to try to turn them into actionable scores that are easy to understand, easy to use. 

And so, I think really while we also kind of have to provide the market as a level of transparency, and make the end users of the information, whether it's data or scores, comfortable with how these methodologies are crafted, how scores are built, and I think that is something that we continue to work on is to provide increasing levels of transparency and education to the end users of the data rather than just providing them scores and data, but also being able to answer all the questions that they have. 

Jenna Dagenhart: In looking at the end users, Andrew, specifically what are you hearing from the end investor? And how may they be using this underlying data to inform investment decisions, and the use of ESG in portfolios? 

Andrew Walsh: There's an increasing sense that they need to be doing the right thing, their end-investors that they ... Their end clients really are demanding this type of thing. They want to know that their own investments are not being parked into something pretty unsavory. I mean, the obvious stuff is things like cluster bomb manufacturers. I mean, there can be some potential ... I've seen horror stories out there for investors who found out that unwittingly they were holding a company like that. So, there's a whole chain going on between the end-investor, our clients, and ourselves, really, they really need to know what's underneath there. So, again, increasingly they are looking at getting a better understanding of the data, the specific scores, and really the individual metrics are increasingly important for them. 

They're really getting a lot more interested and understanding about those specific things that are being looked at. Also, how the different, say, the UNGC scores are being integrated. And also, the ... Basically the different moving parts that are making these indices what they are. 

Jenna Dagenhart: As we discussed this after last year's pandemic, and at the start of a new year, what can we expect next? 

Manjit Jus: So, if we look at the space for ESG data, and ESG research, and scores, I think the importance of reliable, actionable ESG information will continue to grow, the demand for this information is higher than ever. There is mounting pressure globally from regulators on more disclosure, not just for companies, but also for investors that are producing financial products and using financial products that incorporate ESG data and scores. So, transparency is absolutely key. It means that more nuanced ESG scores are required, scores that don't simply measure how companies disclose, but really what companies are doing on ESG topics, what the impacts are that they are having. That means more quantitative data that drives these scores and can really be used to report progress. 

I think that's something that everyone is looking at, is okay, there's a lot of ESG information, there's a lot of ESG products out there, but how do we actually measure real progress? Whether it's against the sustainable development goals, whether it's against climate targets that are becoming increasingly more important. So, any of the underlying data that is being produced as part of these scores, or creating these indices really has to be able to tell that story. 

Jenna Dagenhart: And Andrew, you talked about climate earlier. Can you weigh in on how clients are looking for a deeper green solution? 

Andrew Walsh: Yeah, I think it's interesting because as time has gone by, I mean, again, originally it felt like just getting rid of the sin stocks was enough. And then people wanted to understand ... They wanted to be a bit of a sense of getting rid of the overall ESG laggards. But I think now there's really a sense that people want to move to that next step. There's kind of two lanes of travel here, you could say. There's ones who just want to get rid of the nasty stuff, but increasingly there's a sense that other investors who really want to invest in a best-in-class approach, where you're really removing a majority of the parent index and being left ultimately with what you might call an all-star team of companies. 

So, I think that really is the direction of travel that we're going in, so that's really an interesting space to watch going forward. 

Jenna Dagenhart: Would you say people are more proactive rather than reactive? 

Andrew Walsh: I think they are being more proactive now. I think originally when they were being asked those questions from their end clients, it felt more like a reactive type of thing. But I think now there's a lot more proactivity from the client base asking a lot of more in-depth questions, and it's really those discussions with the clients that help us to get an informed decision about where we need to go with our product range. And that then helps to develop these conversations that we have so S&P DJI, to really go about helping to develop new ideas, and new solutions really that will help the clients meet their end needs in the years to come. 

Jenna Dagenhart: So, advancing new ideas, rather than just simply weeding out bad things that might already be taking place. 

Andrew Walsh: That's right. 

Jenna Dagenhart: And Jaspreet, can you talk to us a little bit more about the indices that go further? 

Jaspreet Duhra: Yeah, absolutely. And I would echo the sentiment that Andrew just made, that there is definitely this increasing appetite from investors to have high conviction ESG indices as well. So, focusing on the narrower range, a narrower pool of companies based on their ESG scores as well as applying quite an extensive range of ESG exclusions, that's certainly an area that we'll be focusing on in 2021. Also, we see that there is a significant shift in investors, in a group with investors who are looking to transition, who are looking at climate transition indices who want to align their investments with a 1.5-degree scenario. Again, we have offerings in this area, but also very interestingly, as I mentioned earlier, ESG scores also need to form a component of these kinds of climate first indices. 

Another area I think we'll see quite a lot of traction in, in 2021 is for investors who are looking for solution companies. So, whether this is companies aligned with the SDGs, or aligned with the new EU taxonomy, investors are looking to identify those companies who could potentially benefit from the shift that we're having towards a more sustainable society and economy. And I think the bread and butter of ESG is also going to remain strong, so there's focus on exclusions, there's focus on whether this is an index that just focuses on exclusions, or whether it's got exclusions as part of an index, that is going to remain a strong trend. It has been for some time; I don't see that changing into 2021 as well. 

But I think the really key message here is that irrespective of the strategy that you're pursuing, ESG scores generally form a vital component of those indices, and that's the kind of holistic expectation that investors have from us when we're providing indices is that we are taking that 360 degree view of sustainability in ESG issues. 

Jenna Dagenhart: As we wrap up this exclusive ESG masterclass, Manjit, is there anything you'd like to add, any final thoughts on your end? 

Manjit Jus: I think one thing that we've seen companies certainly looking at, as well as clients asking about, is the S in ESG. So, certainly there is this continued commitment to the environment, and to climate, that that's extremely important. But I think this past year also uncovered that there is a lack of data and real information available on a lot of social topics that were uncovered as part of a lot of the social unrest you had around the world. Things such as racial injustice, issues related to diversity. So, that's something that we are hearing a lot of questions on is give us more data, and insights on the S piece. And so, I think in context of ESG reporting, there will be pressure on all the areas of ESNG for companies to do a better job, disclose more information, because the S part has historically been something that companies have kind of shied away from. And have gotten away with it because a lot of the focus was on governance and on climate related topics. 

Jenna Dagenhart: Andrew? 

Andrew Walsh: Yeah, I think I agree with those points, I also think that specifically as we ... The Paris-aligned Benchmarks, that'll be interesting to see how that sort of thing develops, as Jaspreet was sort of alluding to. I think it's interesting to see the difference between, say, Eurozone investors versus UK investors. We haven't heard that much from UK investors as regards to demand for the Paris-aligned Benchmarks, and that whole discussion. But I think that that's something that is likely to come forward. But undoubtedly, that will be more of a topic for Eurozone-based investors based on the whole Brexit situation. 

Jenna Dagenhart: Jaspreet, any final words on your end? 

Jaspreet Duhra: Yeah, I think this is a really exciting time of coming into 2021. We can consolidate all the work we've done so far on the ESG side in terms of educating newcomers into ESG, but also, as Andrew and Manjit said, really exciting, interesting, new areas of the ESG as well. So, the social side, as well as those Paris-aligned and climate transition indices. So, there's lots, lots to be achieved in 2021, and I'm looking forward to working with our data providers and with our partners to deliver those results to investors throughout the year.

Jenna Dagenhart: Well everyone, thank you so much for joining us, and really great to have you. 

Andrew Walsh: Thank you. 

Manjit Jus: Thank you. 

Jaspreet Duhra: Thank you. 

Jenna Dagenhart: And thank you for watching this exclusive S&P Dow Jones Indices Masterclass, focused on ESG. It's clearly a very exciting time to be investing in ESG, with more flows, a strong performance, and increased interest kicking off 2021. Just to recap, those panelists were Jaspreet Duhra, EMEA Head of ESG Indices at S&P Dow Jones Indices, Andrew Walsh, Head of ETF and Index Funds Sales, UK and Ireland at UBS Asset Management. And Manjit Jus, Managing Director and Global Head of ESG Research at S&P Global. And I'm Jenna Dagenhart with Asset TV. And I know we talked about a lot of themes today, including climate change, so with that I want to bring you to S&P Dow Jones Indices website for more. 

Global warming poses unprecedented risks to society and investors. Fortunately, climate indices help make it possible to invest in a more resilient future while maintaining broad benchmark exposure. Leveraging powerful data from Trucost, part of S&P Global, to address different carbon reduction objectives, many of these indices align with recommendations of the Task Force for Climate-related Financial Disclosures, and climate benchmark standards proposed by the EU Technical Expert Group on Sustainable Finance. Now, let's take a look at some of S&P Dow Jones Indices climate indices. There's the Paris-aligned and Climate Transition Index Series, as well as the Carbon Efficient Index Series, Carbon Price Risk Index Series, and Fossil Fuel Free Index Series. If you go to S&P Dow Jones Indices' website you can find more information about all of these various indices, you can read about the methodology, read their papers, and learn more about the implications of carbon pricing. 

Let's talk a little bit more about building an industry standard. S&P Down Jones Indices scores are rooted in SAM's esteemed Corporate Sustainability Assessment, which is a robust, survey-based approach to evaluating corporate ESG performance with a focus on financial materiality. 

It's backed by 20 years of investment performance data, and SAM's research methodology is characterized by thoroughness and granularity, rigorous standards for verification, and data sourced transparency. It's conducted annually in the assessment, and tends to identify companies that are better equipped to recognize and respond to emerging sustainability opportunities and challenges. It does this by capturing and evaluating the following for each company. There's recognition of material ESG issues and the role ESG factors can play. Understanding the potential financial impact of ESG exposures. Implementation of strategies to manage ESG risks or capitalize on ESG-related opportunities. Measurement of key ESG performance indicators to evaluate strategy effectiveness, validation or external audit of stated ESG strategies and results, and transparent communication of corporate sustainability strategies and attainment of targets. 

Companies participating in the CSA respond to one of 61 industry-specific questionnaires that in some cases yield more than 1,000 company-level and industry-specific data points. This highly granular data forms the basis for industry-specific Criteria Scores, which in turn roll up into Dimension E, S, and G Scores, and ultimately total ESG Scores. Data at all three of these levels is available for licensing for peer group comparisons and analysis. 

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