December 18, 2024 • 37 mins
As debates around the language and value of ESG persist, the underlying issues continue to influence companies, industries and markets. In this episode of Bloomberg Intelligence’s ESG Currents podcast, BI’s director of ESG research, Eric Kane, is joined by the analysts who have hosted episodes throughout the year to discuss the key ESG themes that will affect investments in 2025. Andrew Stevenson, Rob Du Boff, Melanie Rua, Conrad Tan, Gail Glazerman, Margot Wentzel, Grace Osborne and Christopher Ratti share insights on the climate, supply chains, water, sustainable debt, regulation, cybersecurity, nature and much more.
This episode was recorded on Dec. 12.
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Episode Transcript
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Speaker 1 (00:07):
ESG has become established as a key business theme as
companies and investors seek to navigate the climate crisis, energy transition,
social mega trends, mounting regulatory tension, and pressure from other stakeholders.
The rapidly evolving landscape has become inundated with acronyms, buzzwords,
(00:27):
and lingo, and we aim to break these down with
industry experts. Welcome to ESG Currents, your guide to navigating
the evolving ESG space, one topic at a time, Brought
to you by Bloomberg Intelligence, part of Bloomberg's Research department
with five hundred analysts and strategists working across all major
(00:48):
world markets. I'm Eric Caine, director of ESG Research for
Bloomberg Intelligence. Today we're taking a slightly different approach to
our podcast. Rather than having an extra guests, we'll be
featuring our own Bloomberg Intelligence analysts who have hosted this
podcast throughout the year and will hear their thoughts on
Watson's Store for ESG in twenty twenty five. We'll hear
(01:12):
from Andy Stevenson, Rob Duboff, Melanie Rua, Conrad Tan, Gail Glazerman,
Margot Wentzel, Grace Osborne, Chris Raddy, and finally I'll share
my thoughts as well. We'll cover range of topics that
we see driving investments in twenty twenty five, including climate supply,
chain regulation, water, nature, cybersecurity, and sustainable debt. This will
(01:37):
be our last episode of the year, but on behalf
of the team, we look forward to resuming our weekly
episodes in twenty twenty five. And with that, let's get
to the program. Andy, you cover all things climate curious
to hear your opinion as to whether there are any
esg or more specifically climate themes that you think will
(01:57):
have tailwinds under the Trump administration.
Speaker 2 (02:01):
Sure, Eric, I think there are three, So AI, adaptation,
and tariffs are really the three themes that I think
we'll see some consistent see through the next several months
and even probably years. With respect to the new administration,
AI just being kind of an unstoppable force with the
need to keep the efficiency of those data centers in
(02:22):
check as best as possible. So there's a lot of
opportunity there around enabling the AI at the lowest cost
from a power perspective. Tariffs when you look at what's
going on in the world in terms of kind of
the risk of supply chains, things like recycling companies in
the steel industry, or even in the oil and gas industry.
If you look at the companies that are reducing their
(02:43):
methane most meaningfully, those are also the companies that are
looking to grow outside of the United States with respect
to L and G and are a bit concerned about,
shall we say, about the border adjustments that are likely
to take place in Europe the next few years. So
that's certainly been as englishing factor in that industry as well.
And then lastly, you know, sadly, the cost of climate
(03:04):
continue to rise. No politician is really able to do
much about it in the next year two or three,
and so those costs and the the you know, the
pickup costs, which we think are going to be broady
one hundred million dollars this year total, are probably going
to keep rising and obviously affect the economy as a
whole about three percent three and a half percent of GDP,
(03:26):
and also benefit some companies that are focused on, you know,
really addressing the issue. So those that are looking at
picking up after the last dorm and preparing for the
next one.
Speaker 1 (03:35):
Absolutely, and you mentioned AI obviously a big topic of
conversation these days. You mentioned, you know, alluded to the
fact that there's a lot of power demand associated with AI.
Curious to hear your thoughts on how AI will ultimately
impact US climate goals for the power sector specifically.
Speaker 2 (03:54):
So we've seen, you know, obviously a very very different
world in terms of power demand this year relative to
just even last year, where we thought that power demand
was going to be maybe a half a percent a year.
Now we're looking at three percent a year and in
places like Texas at doubling in the next five years.
So we're seeing really meaningful growth there. The ability to
get power in the hands of these data centers is
(04:20):
sort of rapidly changing investment plans from the utilities, and
so we are seeing more gas, we are seeing more
delays in terms of coal retirements. Obviously renewals are going
to play a big part, and the entire infrastructure around
transmission and distribution is also going to be very impactful.
What we do think, based on a study of forty
utility companies over the next fifteen years their investment plans,
(04:42):
it looks like our climate goals are going to be
definitely susceptible some risk with only about a one percent
fall in our missions over the an annual basis through
about the year twenty forty, relative to five percent that
the IA forecast just last year. And President binds more
ambitious plan of about eleven percent decline over ten years,
(05:03):
you know, in his Clean Power and Net zero plan.
Speaker 1 (05:07):
Excellent, Andy, thanks so much, Thank you so Rob. You've
obviously written a lot about regulation over the last year,
and I think it's very difficult to have a ESG
related conversation these days without some discussion of what ESG
regulation might look like under a Trump administration. So curious
(05:27):
to hear your thoughts ultimately on what the outlook for
ESG regulation is under the Trump administration.
Speaker 3 (05:33):
Yeah, and I think that's a very important question. I
think from a lot of the episodes we've had so
far this year, you know, a lot of a lot
of time and efforts put into how to navigate, you know,
the wide range of global regulations, and you know it's
not helping particularly we're a larger or the largest market.
You know, you're having kind of this constant flip flopping.
Speaker 4 (05:53):
You know.
Speaker 3 (05:53):
Normally, I like to think of myself as a cautiously
optimistic person. Unfortunately, when it comes to kind of issue regulation,
I think I'm wildly pessimistic about what could happen. I mean, certainly,
you look at some of the direct effects that I
mean the Trump administration, even though they've kind of backed
off of the anti woke line of attack, certainly they're
(06:16):
no fans of DEI and some of the kind of
human cap or reporting requirements we were hoping to see
the SEC under the Biden administration, those are probably not happening. Certainly,
the climate rules already been put on hold that the
SEC tried to put through, and we're unlikely to see
the Trump team trying and reevaluate that, if anything, maybe
(06:38):
scale back enforcement of some of the existing climate rules
that are on the book. You know, I'd say probably
the one. I don't know if this is a bright spot,
but you're unlikely to see the Trump administration put in
new negative rules because already the Biden rules are kind
of sitting dormant in the courts, likely to be killed
at some point. It's from a pure technical perspective, it's
(06:59):
a lot easier to have you know, these rules killed
in a courtroom setting then in through the executive branch,
where you know you have to restart, reopen the rule making,
you have to go through this long procedure and then
ultimately you can just be done again if the next
time you have a Democrat in the White House. But
if you go through the courts, you know, it's a
(07:20):
lot harder to revive something. So that's probably the path
we're going to see. I think beyond just the US
rules though, I mean, certainly we've seen state level rules
in California around climate disclosure. Obviously Europe has its whole
European Sustainability Agenda. Those obviously the FEDS don't have direct
authority over. But I certainly do not think the Trump
administration is beyond trying to negotiate. I mean, he always
(07:44):
considers himself this this great negotiator. Tariffs are his new
favorite words. So there are certainly levers he can pull
to try and make life maybe more difficult for California
and force their rules, their rules, or for the European
to maybe give some exemptions or raise the bar for
US companies. So you know, I am I guess concerned
about you know, what regulation looks like over the next
(08:07):
two to four years. I mean, I guess the flip
side of that and you know, we recently had Alison
Taylor on the podcast, you know, to remind us that
during the first Trump administration there was a lot of
you know, a lot of voluntary corporate compliance in response
to some of the policies of the Trump one point
zero administration. So that's certainly an area at bright Spot
(08:28):
we would expect to see in the next four years
that maybe consumer reactions kind of push corporations to do
things voluntarily that you know, we thought would have been
required under regulations.
Speaker 1 (08:41):
Very interesting and throughout the year, you've done several episodes
on shareholder proposals and the growing role of proxy voting
in ESG investing. Curious to hear your thoughts on the
outlook for proxy voting this year.
Speaker 3 (08:54):
Yeah, I think shareholder proposals, it's really you know, we've
seen a huge surge in those, so that it was
driven by changes. I don't want to get too technical
in our short time here, but basically, the Biden administration
made it more difficult for companies to exclude shareholder propos
or put another way, made it a lot easier for
smaller shareholders to have proposals put on the proxy ballot.
(09:18):
So what you're likely to see now under Trump or
under the Trump's SEC, I should say that they're more
likely to revert to their first go around, where you know,
it was very easy for companies to exclude shareholder proposals.
These could be on grounds of what they call micromanagement
or ordinary business. Basically a shareholder proposal. There's only so
(09:39):
many things you can propose about telling a company how
to run their business. You can obviously push for things
at a very high level. You can't go meddling around
day to day operations, but kind of where that line
is is sort of up to the SEC to arbitrate.
Speaker 5 (09:58):
So with a new.
Speaker 3 (09:58):
SEC, you're likely to see a lot less shareholder proposals.
I mean the flip side of that is, you know,
certainly with the large number and again to quote the
numbers off the town my head, it's about it's over
six hundred and fifty shareholder proposals we saw last year,
which is a fifty percent increase from when then that
guidance came in from the Biden administration in twenty twenty one.
(10:21):
So we're likely to see that revert. But then the
flip side is that support overall, as you've seen kind
of more and more proposals being thrown at companies and
thrown at investors to vote for. You know, support for
them has has dwindled. Some of that has been because
of the ESG pushback, but a lot of that has
to be you know, whereas proposals since they had a
very high bar to clear under Trump, you know, you
(10:44):
had a lot more let's say, esoteric proposals under the
Biden administration. That just we're not never going to get
broad shareholder support from the big asset managers of the world.
So I guess the hope going into the next four
years is that you do see a return to form
of at least more thought full shareholder proposals that maybe
you do have a chance of getting some of the
(11:04):
big asset managers, the black Rocks and the vanguards of
the world to sign on for. So you know it certainly,
you know, some have said, I mean, Exxon certainly has
made the case and has tried to pursue this in
court that the number of shareholder proposals has just gotten
out of control. So I wouldn't say that a decline
in proposals is the worst thing, but it is, you know,
(11:26):
it is on the other hand, smaller shareholders and activists
losing the voice. I would say going into the Trump
administration excellent.
Speaker 1 (11:34):
Thanks so much for sharing your thoughts, Rob, Thank you.
Speaker 6 (11:37):
Melanie.
Speaker 1 (11:37):
You've written a lot about nature and water recently, and
I think you know, with water scarcity and climate change accelerating,
I'm curious ultimately to hear how you see companies adapting
and where the investment opportunities may be in twenty twenty five,
and ultimately you know why you think water risks are
(11:58):
a critical concern for industry.
Speaker 6 (12:00):
Yeah.
Speaker 4 (12:00):
Absolutely so it's no surprise that water scarcity is a
growing global crisis. I mean, it's impacting industries all the way,
from agriculture to energy to manufacturing, and it's only getting
worse with the impacts of climate change, like you suggested,
but also growing populations and so on. I mean, this
year alone in twenty twenty four, droughts have driven a
(12:21):
nineteen percent spike in the Mississippi River barge rates. They've
cut Brazil's Arabica coffee yields, which rais future prices over
thirty percent. It also led to waterationing and power cuts
across many countries and cities, including Ecuador. Which has seen
its worst route in sixty years. So these cases already
show the financial stakes tied to water scarcity, which I
(12:42):
believe will push innovation and investments in water efficient technologies
including desalination and increased recycling rates. But companies innovating in
these areas are poised to deliver resilience and really create
value for investors and companies across different industries globally. So,
for example, sample and our Water Opportunities note which we
published earlier this month, we mentioned some of these enablers
(13:05):
that are offering these water solutions that will continue to
see uptake. We know how the three hundred twenty three
billion global water treatment market is projected to reach six
hundred and seventeen billion by twenty thirty two. We also
talk about water infrastructure repair technologies market, which is valued
at seventy four billion twenty twenty three but expected to
(13:26):
grow to one oh nine billion by twenty twenty eight.
So it's clear that managing water effectively is critical and
I believe will continue to see a growing number of
companies and a growing number or amount of allocations to
mitigate related risks and safeguarding operational continuity. So I also
look forward to keeping watch on you know, these enablers
in the new year, like Bolia, Eco lab or Alta
(13:47):
and so on.
Speaker 1 (13:48):
On the nature side, you know you've you've discussed in
various forums the fact that nature tech is a growing
investment theme. Curious to hear your thoughts on its role
and ultimately how you think it's going to reshape the
environmental solutions landscape.
Speaker 4 (14:03):
Yeah, for sure. So nature tech really merges advanced tools
like AI, satellite imagery, remote sensing with ecosystem management. So
this really unlocks scalable solutions to biodiversity loss, water scarcity,
carbon capture. And this intersection of technology and conservation isn't
(14:23):
just compliance driven, but it also offers measurable returns by
boosting such resilience. So in our nature opportunities, note, one
of the tools we highlight its satellite data, and I'm
all about satellite data on the team. Geospatial analysis is
the way to go super interesting. And the global satellite
data services market is projected to reach twenty one billion
(14:44):
by twenty twenty eight from just nine billion in twenty
twenty three. And these companies that are investing in tech
driven solutions like carbon monitoring or precision water management are
addressing environmental risks which while creating new opportunities for growth
and for investors. So this really presents a pivotal theme.
And so even in the Nature as the next Frontier
(15:06):
panel at our end of your conference that literally just passed,
this was a key topic that was discussed. We had
Vicky Benjamin who said it best to she's chief financial
officer of Bosto Common Asset Management, also CEO and co
founder of Carnival Capital. But where you know, the tech
industry is really going to be key for halting biodiversary
also this decade, and she went us far to call
out some leaders including you know, Microsoft and Google. You
(15:29):
know Google Earth has that open infrastructure that you can use,
and we can't manage what we don't measure and nature
tech is really what's going to help us monitor these issues.
Speaker 1 (15:38):
Excellent, mel, thank you so much for joining us.
Speaker 4 (15:40):
Yeah, my pleasure.
Speaker 1 (15:41):
Conrad, you've written a lot about cybersecurity and data privacy
over the year. I'm curious to hear your thoughts looking
ahead into twenty twenty five. Ultimately, how you see the
policy and regulatory landscape evolving for data security and privacy.
Speaker 5 (15:58):
Sure. First, I'd say cybersecurity is likely to remain a
high priority under the Trump administration, but focused on national
security and critical infrastructure such as energy and transportation. Telecoms
companies in particular, such as AT and T and Verizon
and T Mobile and face intense bipartisan pressure in Congress
(16:19):
after their networks were breached for months by intruders. US
officials have linked to China. This is a persistent team,
and looking ahead, that'd say it's likely that if US
China tensions were to rise over technology and trade restrictions,
for example, that could lead to more politically motivated attacks
on US companies and critical infrastructure. Now, the outlook for
(16:41):
consumer data privacy is more mixed. Elon Musk's elevation as
a top ally and advisor of Trump could mean less
pressure on social media companies at least from the US
federal government, but overall businesses face increasingly tight restrictions at
the state level on how they handle consumer data. So
twenty states now have comprehensive data privacy laws in place,
(17:02):
and eight of these take effect in twenty twenty five
and three more in twenty twenty six, and over in Europe,
authorities have made it abundantly clear that they expect companies
to take personal data privacy very seriously. Regulators have been
imposing increasingly large fines in the billions of dollars on
companies such as Meta and Amazon for violations of the
(17:24):
General Data Protection Regulation or GDPR, and frankly, it's not
just social media companies or big tech companies that are
in the spotlight here. The NIS two Directive, which is
being embedded into national laws across the EU, expands cybersecurity
demands on many sectors, including energy, transport, health, banking, chemicals,
(17:44):
and food, among other things. The new rules require companies
to enhance cybersecurity in the supply chains, and it makes
public executives directly liable for failures to comply. We're already
seeing companies report in public filings that they're making changes
to adapt, and this is likely to continue all through
twenty twenty five.
Speaker 1 (18:02):
Super interesting and obviously, artificial intelligence is a big topic,
not just within ESG, but the economy more broadly. Curious
to hear ultimately, how do you think the growth in
artificial intelligence or AI impacts companies in terms of managing
data security and privacy risks?
Speaker 5 (18:20):
Sure, I think there are massive implications for data security
and privacy, and unfortunately they are mainly negative, at least
in the short term for most companies. Now, many of
our listeners have likely had a chance to use or
witness directly AI tools that can easily generate text, voices,
images and videos in different languages. These very same tools
also enable social engineering attacks to target individuals very precisely,
(18:44):
for example, by tailoring phishing emails using a native language
or mimicking the writing style or voice of top executives
in an organization to deliver instructions, increasing the likelihood of
such attacks being successful, and we've already seen instances of
this in twenty twenty four, for example in February when
UK engineering firm was defrauded of twenty six millions of
(19:05):
dollars using an AI generated video conference call, where an
employee was persuaded to transfer the funds. And clearly the
tools available have only becomes more sophisticated since then, and
twenty twenty five is likely to go in and see
a lot more social engineering attacks supported by the use
of AI. Beyond this, AI also enhances the ability of
attackers to scan for vulnerabilities and target weak links, which
(19:28):
may not be the company itself but part of its
overall supply chain. It could be a vendor with weaker defenses,
and then once define the weakest link, they can then
steal data or threaten to disrupt the business and demand ransoms.
All of this puts pressure on companies to spend more
on staff training and defenses. It also likely pushes more
businesses to think how they protect sensitive data. In particular,
(19:50):
I think it supports the view some companies have adopted,
which is that their defenses will be breached at some point,
and therefore they're redesigning defenses to limit damage when reaches
do happen. Zero trust practices ru an example of that.
They've been recommended as best practice by US and EU
authorities for a few years now, but our research shows
only thirteen percent of the S and P five hundred
(20:11):
and nine percent of stock six hundred companies reported such
efforts in twenty twenty four. We think this could rise
further in twenty twenty five as businesses face greater pressure
to strengthen data security. Moving away from traditional data security
practices to a zero trust approach requires new processes, tools,
and staff training. This is usually a multi year approach.
(20:32):
It obviously costs money, but companies do need to weigh
that against the potential costs of a breach, which again
can disrupt operations, lose their customers trust, and also attract
regulatory penalties. And ultimately, I think the pressure on companies
to internalize more of the social harm from data and
privacy breaches is only going to increase, which should drive
(20:54):
more companies to make these upfront investments.
Speaker 1 (20:58):
Very interesting, countrat texts much for joining us.
Speaker 5 (21:01):
Thank you for having me.
Speaker 1 (21:02):
Gail, one of your biggest focuses has been on the
intersection of ESG and financial materiality. So looking out to
twenty twenty five, what are some of the areas you
are focused on.
Speaker 7 (21:15):
So I think one of the top ones that I
would identify is supply chain, and that's for three reasons.
The risks associated with relocation which could accelerate enforcement and
regulatory action as well as just pure environmental impacts. So
thinking about relocation, companies have been reevaluating supply chains in
the aftermath of COVID given all the stresses that emerged. However,
(21:39):
when you look back to the prior Trump administration, with
the threat of tariffs, you did see some very aggressive
moves to adjust supply chains. So if companies look to
reposition themselves ahead of potential protectionist actions from the new administration,
companies could be opening themselves up to risks that they
may underappreciate in terms of during they've done sufficient vetting
(22:03):
and have the tools and systems in place to monitor
supply chains and new locations. In terms of enforcement and regulation,
while the EU deforestation law has been delayed, it's still
going to take time to put the tools and systems
in place to respond to that, and companies could be
looking at incremental costs as well as fines if they
(22:25):
failed to do it. And then there are other regulations on.
Speaker 8 (22:28):
Top of that.
Speaker 7 (22:29):
Don't expect the US to back away from enforcing things
like the Weager Force Labor Protection Act, and so those
regulations don't go away. And then finally, on their environmental side,
we have seen many commodities hitting recent, if not all
time highs in twenty twenty four, largely due to extreme
(22:52):
drought and storm damage, and in some cases from a
financial perspective, companies have been cushioned from this because of hedging.
But as we look to twenty twenty five, those will
wear off the business decisions on how to address it's
going to start to impact, and companies are going to
have to make longer term decisions to ensure secure supply
of commodities in light of what would be expected to
(23:16):
be incremental environmental pressure due to climate change. So I
think this is really going to resonate and be a
theme that crops up across a lot of industries as
we look out to twenty twenty five, but certainly food
and other commodity expost industries are going to be very
high on the list.
Speaker 1 (23:33):
Really interesting, and you mentioned the potential impact of threatened tariffs.
Are there any other potential changes with the new administration
that you're tracking?
Speaker 7 (23:42):
One really interesting unknown to me is going to be
despite all of the typical deeprade regulatory push that you
might see from a new Republican administration, how the Trump administration,
the second Trump administration enforces antitrust competitive anti competitive behaviors.
We've seen significantly ramped up enforcement throughout the Biden administration
(24:07):
with some high profile deals that had to be abandoned,
and I'm not sure it's a sure thing that that
goes away completely. While it probably does ease up and
particularly with a focus on tech. Maybe coming from different angles,
but it seems like there will still be quite a
lot of scrutiny on the tech industry moving forward. And
it's also worth mentioning no matter what happens in the US,
these are global companies and the scrutiny has not been
(24:29):
any less intense looking to other regions like Europe.
Speaker 1 (24:33):
Really really interesting, Gil, Thank you so much for your insights.
Thanks Margo. You've written a lot of research over the
last year on climate and within climate, of course, looking
specifically at how companies are setting carbon reduction targets, what
those targets mean. Curious ultimately to hear your thoughts on
the fact that many companies are setting carbon reduction targets
(24:55):
for twenty thirty as we approach twenty twenty five, you know,
only five years out from twenty thirty. Curious to hear
kind of what trends you're expecting with respect to target
setting going forward.
Speaker 9 (25:07):
Yeah. I have been looking at our bicarbon data set
a lot lately, which anyone can find on terminal at
bicarbon Go. It includes almost five hundred of the top
emitting companies, or sixty percent of emissions from listed companies,
and of those nearly eighty five percent have set carbon
reduction strategies for twenty thirty. These targets that have been
(25:30):
set do lack ambition, with only a third of those
targets in line with a one point five degree celsius
temperature a line benchmark for twenty thirty. And when we
look at the credibility of those targets, ie will these
companies meet them or not? There are some concerns whether
companies will meet their targets at all, regardless of their ambition,
(25:52):
which could suggest risk to investors. We have assessed the
credibility of carbon targets from a few key industries, with
more to come but for right now, looking at airlines, chemicals,
marine shipping, automobiles, E ANDP and cement, and we've found
that out of our two hundred and three company peer group,
(26:13):
twelve of these targets are credible, meaning those companies may
actually meet their targets in our view. But if those twelve,
only seven are in line with a one point five
degree aligned benchmark, which is only three percent of the
total strategies.
Speaker 1 (26:29):
Super interesting and certainly numbers that are not caused for optimism.
So maybe diving deeper into this idea of credibility, curious
to hear how you're ultimately assessing carbon target credibility and
is there anything that you're expecting from the credibility lens
as we move forward into twenty twenty five.
Speaker 9 (26:49):
Yeah. We took an industry specific approach, so looking at
exactly what do these companies in this industry do and
what do they need to decarbonize, what are the potential
pathways to reduce emissions? For example, for autos, we built
a model that calculates the number of battery electric vehicles
(27:09):
a company would need to sell in twenty thirty to
meet its tailpipe emissions target, and not to be too optimistic,
but none of those targets are credible. For airlines, we
built a model looking at how much sustainable aviation fuel
a company would need to meet their stated twenty thirty target,
and how does that sustainable aviation fuel target compare to
(27:32):
the company sustainable aviation target and we found that most
fall short and that there is a lack of staff
globally available. Anyways, Interestingly, we publish this analysis and a
few months later we saw Air New Zealand get rid
of its carbon reduction target because there isn't enough sustainable
aviation fuel available for them to meet their target. And
(27:54):
so let's bring it back to twenty twenty five. We
are approaching twenty thirty. We are five years out, which
may seem like a lot of time, but when we
consider what needs to be done by some of these
companies to meet their targets, which could include high capital
investment and technology buildouts, I think we could see more
companies dropping their targets or those targets being revised down
(28:16):
in some way next year, especially in industries considered harder
to abate or where solutions may be more feasible longer term.
So post twenty.
Speaker 1 (28:25):
Thirty really interesting stuff, Margot, thanks so much for the insights.
Th Thank you so Grace. You've spent a lot of
time focused on two key areas within the ESG conversation
over the year. One is nature and biodiversity and the
other is kind of all things sustainable finance, really what
banks are doing. So have a couple questions for you.
(28:48):
The first is what do you think the role of
banks is when it comes to nature and biodiversity and
how do you expect that to evolve?
Speaker 2 (28:57):
Yeah?
Speaker 8 (28:57):
Absolutely, I think nature loss is definitely an emerging era
of risk for banks. We've seen I guess previously climate
really dominating their agendas in terms of mistigating transition risks
with financial emissions targets, exclusions, sets, and high carbon sectors.
And actually a CDP study found that only twenty percent
of financial institutions are currently measuring their exposure to nature,
(29:19):
and that's versus eighty five percent, which calculate potential vulnerability
to kind of climate impacts. But I think we're beginning
to see banks consider things like deforestation and water use
and positioning statements, and I think we'll see this gain momentum,
particularly as regulations such as EU Deforestation Free Regulation comes
into force, which essentially prevents some companies with exposure to
(29:41):
deforestation from exposing products to the block. So for businesses,
biodiversity losses definitely bringing both kind of physical and transition risks,
whether it's for example, within their supply chain of its
disruptions or more scrutiny, and this of course creates transition
risk exposure for the banks that finance them. Banks that
we've kind of seen leading the way being like BMP,
(30:03):
Parry Bass and a chartered where they've implemented maybe more
advanced policies focusing on deforestation risk or commitments to zero deforestation,
and some have actually begun to introduce exclusions to clients
operating on recently cleared land and also pushing for better
practices and water and past side use. So I think
banks have a really key role in the nature gender,
(30:27):
particularly through integrating biodiversity considerations into financing and lending and
their risk management processes. And not only are they going
to be hedging their own risk, they can obviously influence
corporate behavior going forward. So I think we're seeing increasing
number of banks begin to consider things such as deforestation
and water use, and hopefully going forward it will evolve
to even more advanced policies to kind of mitigate impacts
(30:49):
on nature.
Speaker 1 (30:51):
Very interesting, and I think you know, in the estory space,
we've talked a lot about ultimately how banks can enable
the climate transition or energy transition. Curious to hear your
thoughts on how banks can enable a transition to a
more nature positive economy.
Speaker 6 (31:07):
Yeah.
Speaker 8 (31:07):
Absolutely, I think scaling finance to biodiversity has been a
substantial challenge, so banks are going to play a critical
role in accelerating the transition to a more nature positive economy.
Use the stat yesterday are Conference that the World Economic
Firm estimates that transitioning to a more nature positive economy
could up unlock up to ten trillion dollars in business opportunities.
(31:31):
So this essentially presents new revenue streams for banks much
in the same way that we've seen them financing low
carbon clients. Also these clients that are doing things to
drive a more nature positive economy, and we see five
key kind of frontiers where there are opportunities for financing
across cycle economy, water solutions, sustainable materials, land management, and
(31:53):
nature data. So I think banks will be really critical
in scaling financing towards these areas.
Speaker 5 (31:59):
I think we'll also we.
Speaker 8 (32:00):
See an expansion of banks biderversity related product offerings we've
seen and also their fixed income assurance expanding BBVA for example,
and the International Finance Corporation issued a fifteen million dollar
fust chance of our world's first bid diversity born earlier
this year, so hope we will see that momentum continue.
And another area we've seen banks become increasingly involved in
(32:22):
is depth and nature swaps. So there's an estimated two
trillion dollars of developing country debt that we may be
eligible for depth for nature swaps. That's according to the
nature constitracy. So we expect this trend to really accelerate.
In twenty twenty five, Gold and Sacks in macrom America
working on a swap for Ecuador to product part of
the Amazon rainforest. Sanachatid has a swap in the pipeline,
(32:45):
and BNP has been exploring various deals. So I definitely
think we'll see this trend going forward, and I think
we'll see banks just increasingly engaged in nature and nature
specific product offerings to kind of capture the growing demand
for biderverse financing game.
Speaker 1 (33:00):
Forward really really interesting, Grace, Thank you so much for
sharing your insights. Thank you, Chris. Curious to hear your
thoughts on the sustainable debt markets as we enter a
second term for Trump.
Speaker 6 (33:14):
Yeah, thanks Eric. I don't believe the market overall will
be greatly impacted by the Trump administration. You know, financing
means of vital and necessary part of governments, supernationals and
corporations goals to achieve their sustainability targets. And I think
the green social sustainability. Bond market continues to offer a
(33:36):
great source of capital for these entities. We've seen an
average of over one point six trillion in debt utilized
by these issuers over the past four years. And you know,
let's not forget we saw tremendous growth during the first
Trump administration as the market was still really trying to
gain traction. So I don't think this second term should
do much to deter issuance. Many of the programs that
(33:58):
are out there currently too in the form of the
IRA should remain in place and continue to support the market.
But if some of these programs are threatened, we could
just see issuance get pulled forward as people try to
still take advantage of them before they get pulled. So,
you know, I still believe that the system of debt
market will remain an integral part of the overall debt market.
Speaker 1 (34:22):
Interesting, So, does that mean you're expecting issuance to grow
next year or could there be still some slowing in
issuance from the market for related reasons.
Speaker 6 (34:32):
Well, I think if you look at this year, number one,
you see the issuance was at record levels. Now there
was a reclassification of Jenny May's single family mortgages that
goes back to twenty twenty three when they establish their
social bond principles, So that accounts for over four hundred
billion additional labeled social bond issuance, but without it would
still be around twenty twenty three levels of roughly one
(34:55):
point six billion, So it still would have been a
great year overall this year, and that's kind of a
very positive point that, you know, the market continues to
be strong, So for twenty twenty five, I would expect
issues to be kind of similar levels as we've seen
strength come from a lot of areas such as sovereign issuance,
with most still committed to issuing annually and other sovereigns
(35:19):
still enter the market. We've also seen continued strong issuments
from supernationals like the World Bank and IDB, and utilities
are at recorditionments levels as well as they address a
lot of their sustainability needs and really focusing on fixing
the grid. So barring any dramatic changes to the market,
like interest rate hikes steming from wrapping inflation, you know,
(35:43):
we've heard some people that are worried about rapid inflation
as a result of expansive teriffs. But you know, barring
any type of drastic change to interest rates, then you know,
I feel very confident that Issues should exceed the one
point six trillion again in twenty twenty five and could
potentially break to two trillion market.
Speaker 1 (36:02):
Really interesting, Chris, thank you so much for joining me.
Speaker 6 (36:05):
Yeah, glad I could be part of it, Eric appreciate it.
Speaker 1 (36:08):
In terms of my expectations for the year ahead, I
guess I'll start by saying there's going to be a
lot of noise, especially here in the US. We'll see
a lot of talk about regulation and efforts to claw
back momentum on a variety of fronts, including climate, labor,
and diversity. I believe we're going to see continued debate
around the term ESG and its value. We're going to
(36:29):
see companies leaving ESG related alliances and scaling back on
various targets and commitments. And while all this can have
an impact, I'll repeat what I've often said, which is,
regardless of labels and politics, the underlying ESG issues will
continue to impact companies, industries, and markets. On today's episode,
(36:50):
we heard many tangible examples of how issues like climate,
water cybersecurity and supply chain will continue to create risk
and opportunity, and the team I look forward to providing
more research on these topics and much more going forward.
Thank you to the team for joining today's episode, and
Asah mentioned in the intro, this will be our last
(37:10):
episode of twenty twenty four. We wish you all a
happy holiday season and we look forward to returning to
our weekly episode Cadence in twenty twenty five. In the meantime,
as always, you can find more information on all things
ESG by going to our dashboard bispace ESG go on
the Bloomberg terminal, and if you have an ESG quandary
(37:30):
or burning question you would like to ask bi's expert analysts,
please send us an email at ESG Currents at Bloomberg
dot net. Thank you so much, and we'll see you
next time.
ESG has become established as a key business theme as
companies and investors seek to navigate the climate crisis, energy transition,
social mega trends, mounting regulatory tension, and pressure from other stakeholders.
The rapidly evolving landscape has become inundated with acronyms, buzzwords,
(00:27):
and lingo, and we aim to break these down with
industry experts. Welcome to ESG Currents, your guide to navigating
the evolving ESG space, one topic at a time, Brought
to you by Bloomberg Intelligence, part of Bloomberg's Research department
with five hundred analysts and strategists working across all major
(00:48):
world markets. I'm Eric Caine, director of ESG Research for
Bloomberg Intelligence. Today we're taking a slightly different approach to
our podcast. Rather than having an extra guests, we'll be
featuring our own Bloomberg Intelligence analysts who have hosted this
podcast throughout the year and will hear their thoughts on
Watson's Store for ESG in twenty twenty five. We'll hear
(01:12):
from Andy Stevenson, Rob Duboff, Melanie Rua, Conrad Tan, Gail Glazerman,
Margot Wentzel, Grace Osborne, Chris Raddy, and finally I'll share
my thoughts as well. We'll cover range of topics that
we see driving investments in twenty twenty five, including climate supply,
chain regulation, water, nature, cybersecurity, and sustainable debt. This will
(01:37):
be our last episode of the year, but on behalf
of the team, we look forward to resuming our weekly
episodes in twenty twenty five. And with that, let's get
to the program. Andy, you cover all things climate curious
to hear your opinion as to whether there are any
esg or more specifically climate themes that you think will
(01:57):
have tailwinds under the Trump administration.
Speaker 2 (02:01):
Sure, Eric, I think there are three, So AI, adaptation,
and tariffs are really the three themes that I think
we'll see some consistent see through the next several months
and even probably years. With respect to the new administration,
AI just being kind of an unstoppable force with the
need to keep the efficiency of those data centers in
(02:22):
check as best as possible. So there's a lot of
opportunity there around enabling the AI at the lowest cost
from a power perspective. Tariffs when you look at what's
going on in the world in terms of kind of
the risk of supply chains, things like recycling companies in
the steel industry, or even in the oil and gas industry.
If you look at the companies that are reducing their
(02:43):
methane most meaningfully, those are also the companies that are
looking to grow outside of the United States with respect
to L and G and are a bit concerned about,
shall we say, about the border adjustments that are likely
to take place in Europe the next few years. So
that's certainly been as englishing factor in that industry as well.
And then lastly, you know, sadly, the cost of climate
(03:04):
continue to rise. No politician is really able to do
much about it in the next year two or three,
and so those costs and the the you know, the
pickup costs, which we think are going to be broady
one hundred million dollars this year total, are probably going
to keep rising and obviously affect the economy as a
whole about three percent three and a half percent of GDP,
(03:26):
and also benefit some companies that are focused on, you know,
really addressing the issue. So those that are looking at
picking up after the last dorm and preparing for the
next one.
Speaker 1 (03:35):
Absolutely, and you mentioned AI obviously a big topic of
conversation these days. You mentioned, you know, alluded to the
fact that there's a lot of power demand associated with AI.
Curious to hear your thoughts on how AI will ultimately
impact US climate goals for the power sector specifically.
Speaker 2 (03:54):
So we've seen, you know, obviously a very very different
world in terms of power demand this year relative to
just even last year, where we thought that power demand
was going to be maybe a half a percent a year.
Now we're looking at three percent a year and in
places like Texas at doubling in the next five years.
So we're seeing really meaningful growth there. The ability to
get power in the hands of these data centers is
(04:20):
sort of rapidly changing investment plans from the utilities, and
so we are seeing more gas, we are seeing more
delays in terms of coal retirements. Obviously renewals are going
to play a big part, and the entire infrastructure around
transmission and distribution is also going to be very impactful.
What we do think, based on a study of forty
utility companies over the next fifteen years their investment plans,
(04:42):
it looks like our climate goals are going to be
definitely susceptible some risk with only about a one percent
fall in our missions over the an annual basis through
about the year twenty forty, relative to five percent that
the IA forecast just last year. And President binds more
ambitious plan of about eleven percent decline over ten years,
(05:03):
you know, in his Clean Power and Net zero plan.
Speaker 1 (05:07):
Excellent, Andy, thanks so much, Thank you so Rob. You've
obviously written a lot about regulation over the last year,
and I think it's very difficult to have a ESG
related conversation these days without some discussion of what ESG
regulation might look like under a Trump administration. So curious
(05:27):
to hear your thoughts ultimately on what the outlook for
ESG regulation is under the Trump administration.
Speaker 3 (05:33):
Yeah, and I think that's a very important question. I
think from a lot of the episodes we've had so
far this year, you know, a lot of a lot
of time and efforts put into how to navigate, you know,
the wide range of global regulations, and you know it's
not helping particularly we're a larger or the largest market.
You know, you're having kind of this constant flip flopping.
Speaker 4 (05:53):
You know.
Speaker 3 (05:53):
Normally, I like to think of myself as a cautiously
optimistic person. Unfortunately, when it comes to kind of issue regulation,
I think I'm wildly pessimistic about what could happen. I mean, certainly,
you look at some of the direct effects that I
mean the Trump administration, even though they've kind of backed
off of the anti woke line of attack, certainly they're
(06:16):
no fans of DEI and some of the kind of
human cap or reporting requirements we were hoping to see
the SEC under the Biden administration, those are probably not happening. Certainly,
the climate rules already been put on hold that the
SEC tried to put through, and we're unlikely to see
the Trump team trying and reevaluate that, if anything, maybe
(06:38):
scale back enforcement of some of the existing climate rules
that are on the book. You know, I'd say probably
the one. I don't know if this is a bright spot,
but you're unlikely to see the Trump administration put in
new negative rules because already the Biden rules are kind
of sitting dormant in the courts, likely to be killed
at some point. It's from a pure technical perspective, it's
(06:59):
a lot easier to have you know, these rules killed
in a courtroom setting then in through the executive branch,
where you know you have to restart, reopen the rule making,
you have to go through this long procedure and then
ultimately you can just be done again if the next
time you have a Democrat in the White House. But
if you go through the courts, you know, it's a
(07:20):
lot harder to revive something. So that's probably the path
we're going to see. I think beyond just the US
rules though, I mean, certainly we've seen state level rules
in California around climate disclosure. Obviously Europe has its whole
European Sustainability Agenda. Those obviously the FEDS don't have direct
authority over. But I certainly do not think the Trump
administration is beyond trying to negotiate. I mean, he always
(07:44):
considers himself this this great negotiator. Tariffs are his new
favorite words. So there are certainly levers he can pull
to try and make life maybe more difficult for California
and force their rules, their rules, or for the European
to maybe give some exemptions or raise the bar for
US companies. So you know, I am I guess concerned
about you know, what regulation looks like over the next
(08:07):
two to four years. I mean, I guess the flip
side of that and you know, we recently had Alison
Taylor on the podcast, you know, to remind us that
during the first Trump administration there was a lot of
you know, a lot of voluntary corporate compliance in response
to some of the policies of the Trump one point
zero administration. So that's certainly an area at bright Spot
(08:28):
we would expect to see in the next four years
that maybe consumer reactions kind of push corporations to do
things voluntarily that you know, we thought would have been
required under regulations.
Speaker 1 (08:41):
Very interesting and throughout the year, you've done several episodes
on shareholder proposals and the growing role of proxy voting
in ESG investing. Curious to hear your thoughts on the
outlook for proxy voting this year.
Speaker 3 (08:54):
Yeah, I think shareholder proposals, it's really you know, we've
seen a huge surge in those, so that it was
driven by changes. I don't want to get too technical
in our short time here, but basically, the Biden administration
made it more difficult for companies to exclude shareholder propos
or put another way, made it a lot easier for
smaller shareholders to have proposals put on the proxy ballot.
(09:18):
So what you're likely to see now under Trump or
under the Trump's SEC, I should say that they're more
likely to revert to their first go around, where you know,
it was very easy for companies to exclude shareholder proposals.
These could be on grounds of what they call micromanagement
or ordinary business. Basically a shareholder proposal. There's only so
(09:39):
many things you can propose about telling a company how
to run their business. You can obviously push for things
at a very high level. You can't go meddling around
day to day operations, but kind of where that line
is is sort of up to the SEC to arbitrate.
Speaker 5 (09:58):
So with a new.
Speaker 3 (09:58):
SEC, you're likely to see a lot less shareholder proposals.
I mean the flip side of that is, you know,
certainly with the large number and again to quote the
numbers off the town my head, it's about it's over
six hundred and fifty shareholder proposals we saw last year,
which is a fifty percent increase from when then that
guidance came in from the Biden administration in twenty twenty one.
(10:21):
So we're likely to see that revert. But then the
flip side is that support overall, as you've seen kind
of more and more proposals being thrown at companies and
thrown at investors to vote for. You know, support for
them has has dwindled. Some of that has been because
of the ESG pushback, but a lot of that has
to be you know, whereas proposals since they had a
very high bar to clear under Trump, you know, you
(10:44):
had a lot more let's say, esoteric proposals under the
Biden administration. That just we're not never going to get
broad shareholder support from the big asset managers of the world.
So I guess the hope going into the next four
years is that you do see a return to form
of at least more thought full shareholder proposals that maybe
you do have a chance of getting some of the
(11:04):
big asset managers, the black Rocks and the vanguards of
the world to sign on for. So you know it certainly,
you know, some have said, I mean, Exxon certainly has
made the case and has tried to pursue this in
court that the number of shareholder proposals has just gotten
out of control. So I wouldn't say that a decline
in proposals is the worst thing, but it is, you know,
(11:26):
it is on the other hand, smaller shareholders and activists
losing the voice. I would say going into the Trump
administration excellent.
Speaker 1 (11:34):
Thanks so much for sharing your thoughts, Rob, Thank you.
Speaker 6 (11:37):
Melanie.
Speaker 1 (11:37):
You've written a lot about nature and water recently, and
I think you know, with water scarcity and climate change accelerating,
I'm curious ultimately to hear how you see companies adapting
and where the investment opportunities may be in twenty twenty five,
and ultimately you know why you think water risks are
(11:58):
a critical concern for industry.
Speaker 6 (12:00):
Yeah.
Speaker 4 (12:00):
Absolutely so it's no surprise that water scarcity is a
growing global crisis. I mean, it's impacting industries all the way,
from agriculture to energy to manufacturing, and it's only getting
worse with the impacts of climate change, like you suggested,
but also growing populations and so on. I mean, this
year alone in twenty twenty four, droughts have driven a
(12:21):
nineteen percent spike in the Mississippi River barge rates. They've
cut Brazil's Arabica coffee yields, which rais future prices over
thirty percent. It also led to waterationing and power cuts
across many countries and cities, including Ecuador. Which has seen
its worst route in sixty years. So these cases already
show the financial stakes tied to water scarcity, which I
(12:42):
believe will push innovation and investments in water efficient technologies
including desalination and increased recycling rates. But companies innovating in
these areas are poised to deliver resilience and really create
value for investors and companies across different industries globally. So,
for example, sample and our Water Opportunities note which we
published earlier this month, we mentioned some of these enablers
(13:05):
that are offering these water solutions that will continue to
see uptake. We know how the three hundred twenty three
billion global water treatment market is projected to reach six
hundred and seventeen billion by twenty thirty two. We also
talk about water infrastructure repair technologies market, which is valued
at seventy four billion twenty twenty three but expected to
(13:26):
grow to one oh nine billion by twenty twenty eight.
So it's clear that managing water effectively is critical and
I believe will continue to see a growing number of
companies and a growing number or amount of allocations to
mitigate related risks and safeguarding operational continuity. So I also
look forward to keeping watch on you know, these enablers
in the new year, like Bolia, Eco lab or Alta
(13:47):
and so on.
Speaker 1 (13:48):
On the nature side, you know you've you've discussed in
various forums the fact that nature tech is a growing
investment theme. Curious to hear your thoughts on its role
and ultimately how you think it's going to reshape the
environmental solutions landscape.
Speaker 4 (14:03):
Yeah, for sure. So nature tech really merges advanced tools
like AI, satellite imagery, remote sensing with ecosystem management. So
this really unlocks scalable solutions to biodiversity loss, water scarcity,
carbon capture. And this intersection of technology and conservation isn't
(14:23):
just compliance driven, but it also offers measurable returns by
boosting such resilience. So in our nature opportunities, note, one
of the tools we highlight its satellite data, and I'm
all about satellite data on the team. Geospatial analysis is
the way to go super interesting. And the global satellite
data services market is projected to reach twenty one billion
(14:44):
by twenty twenty eight from just nine billion in twenty
twenty three. And these companies that are investing in tech
driven solutions like carbon monitoring or precision water management are
addressing environmental risks which while creating new opportunities for growth
and for investors. So this really presents a pivotal theme.
And so even in the Nature as the next Frontier
(15:06):
panel at our end of your conference that literally just passed,
this was a key topic that was discussed. We had
Vicky Benjamin who said it best to she's chief financial
officer of Bosto Common Asset Management, also CEO and co
founder of Carnival Capital. But where you know, the tech
industry is really going to be key for halting biodiversary
also this decade, and she went us far to call
out some leaders including you know, Microsoft and Google. You
(15:29):
know Google Earth has that open infrastructure that you can use,
and we can't manage what we don't measure and nature
tech is really what's going to help us monitor these issues.
Speaker 1 (15:38):
Excellent, mel, thank you so much for joining us.
Speaker 4 (15:40):
Yeah, my pleasure.
Speaker 1 (15:41):
Conrad, you've written a lot about cybersecurity and data privacy
over the year. I'm curious to hear your thoughts looking
ahead into twenty twenty five. Ultimately, how you see the
policy and regulatory landscape evolving for data security and privacy.
Speaker 5 (15:58):
Sure. First, I'd say cybersecurity is likely to remain a
high priority under the Trump administration, but focused on national
security and critical infrastructure such as energy and transportation. Telecoms
companies in particular, such as AT and T and Verizon
and T Mobile and face intense bipartisan pressure in Congress
(16:19):
after their networks were breached for months by intruders. US
officials have linked to China. This is a persistent team,
and looking ahead, that'd say it's likely that if US
China tensions were to rise over technology and trade restrictions,
for example, that could lead to more politically motivated attacks
on US companies and critical infrastructure. Now, the outlook for
(16:41):
consumer data privacy is more mixed. Elon Musk's elevation as
a top ally and advisor of Trump could mean less
pressure on social media companies at least from the US
federal government, but overall businesses face increasingly tight restrictions at
the state level on how they handle consumer data. So
twenty states now have comprehensive data privacy laws in place,
(17:02):
and eight of these take effect in twenty twenty five
and three more in twenty twenty six, and over in Europe,
authorities have made it abundantly clear that they expect companies
to take personal data privacy very seriously. Regulators have been
imposing increasingly large fines in the billions of dollars on
companies such as Meta and Amazon for violations of the
(17:24):
General Data Protection Regulation or GDPR, and frankly, it's not
just social media companies or big tech companies that are
in the spotlight here. The NIS two Directive, which is
being embedded into national laws across the EU, expands cybersecurity
demands on many sectors, including energy, transport, health, banking, chemicals,
(17:44):
and food, among other things. The new rules require companies
to enhance cybersecurity in the supply chains, and it makes
public executives directly liable for failures to comply. We're already
seeing companies report in public filings that they're making changes
to adapt, and this is likely to continue all through
twenty twenty five.
Speaker 1 (18:02):
Super interesting and obviously, artificial intelligence is a big topic,
not just within ESG, but the economy more broadly. Curious
to hear ultimately, how do you think the growth in
artificial intelligence or AI impacts companies in terms of managing
data security and privacy risks?
Speaker 5 (18:20):
Sure, I think there are massive implications for data security
and privacy, and unfortunately they are mainly negative, at least
in the short term for most companies. Now, many of
our listeners have likely had a chance to use or
witness directly AI tools that can easily generate text, voices,
images and videos in different languages. These very same tools
also enable social engineering attacks to target individuals very precisely,
(18:44):
for example, by tailoring phishing emails using a native language
or mimicking the writing style or voice of top executives
in an organization to deliver instructions, increasing the likelihood of
such attacks being successful, and we've already seen instances of
this in twenty twenty four, for example in February when
UK engineering firm was defrauded of twenty six millions of
(19:05):
dollars using an AI generated video conference call, where an
employee was persuaded to transfer the funds. And clearly the
tools available have only becomes more sophisticated since then, and
twenty twenty five is likely to go in and see
a lot more social engineering attacks supported by the use
of AI. Beyond this, AI also enhances the ability of
attackers to scan for vulnerabilities and target weak links, which
(19:28):
may not be the company itself but part of its
overall supply chain. It could be a vendor with weaker defenses,
and then once define the weakest link, they can then
steal data or threaten to disrupt the business and demand ransoms.
All of this puts pressure on companies to spend more
on staff training and defenses. It also likely pushes more
businesses to think how they protect sensitive data. In particular,
(19:50):
I think it supports the view some companies have adopted,
which is that their defenses will be breached at some point,
and therefore they're redesigning defenses to limit damage when reaches
do happen. Zero trust practices ru an example of that.
They've been recommended as best practice by US and EU
authorities for a few years now, but our research shows
only thirteen percent of the S and P five hundred
(20:11):
and nine percent of stock six hundred companies reported such
efforts in twenty twenty four. We think this could rise
further in twenty twenty five as businesses face greater pressure
to strengthen data security. Moving away from traditional data security
practices to a zero trust approach requires new processes, tools,
and staff training. This is usually a multi year approach.
(20:32):
It obviously costs money, but companies do need to weigh
that against the potential costs of a breach, which again
can disrupt operations, lose their customers trust, and also attract
regulatory penalties. And ultimately, I think the pressure on companies
to internalize more of the social harm from data and
privacy breaches is only going to increase, which should drive
(20:54):
more companies to make these upfront investments.
Speaker 1 (20:58):
Very interesting, countrat texts much for joining us.
Speaker 5 (21:01):
Thank you for having me.
Speaker 1 (21:02):
Gail, one of your biggest focuses has been on the
intersection of ESG and financial materiality. So looking out to
twenty twenty five, what are some of the areas you
are focused on.
Speaker 7 (21:15):
So I think one of the top ones that I
would identify is supply chain, and that's for three reasons.
The risks associated with relocation which could accelerate enforcement and
regulatory action as well as just pure environmental impacts. So
thinking about relocation, companies have been reevaluating supply chains in
the aftermath of COVID given all the stresses that emerged. However,
(21:39):
when you look back to the prior Trump administration, with
the threat of tariffs, you did see some very aggressive
moves to adjust supply chains. So if companies look to
reposition themselves ahead of potential protectionist actions from the new administration,
companies could be opening themselves up to risks that they
may underappreciate in terms of during they've done sufficient vetting
(22:03):
and have the tools and systems in place to monitor
supply chains and new locations. In terms of enforcement and regulation,
while the EU deforestation law has been delayed, it's still
going to take time to put the tools and systems
in place to respond to that, and companies could be
looking at incremental costs as well as fines if they
(22:25):
failed to do it. And then there are other regulations on.
Speaker 8 (22:28):
Top of that.
Speaker 7 (22:29):
Don't expect the US to back away from enforcing things
like the Weager Force Labor Protection Act, and so those
regulations don't go away. And then finally, on their environmental side,
we have seen many commodities hitting recent, if not all
time highs in twenty twenty four, largely due to extreme
(22:52):
drought and storm damage, and in some cases from a
financial perspective, companies have been cushioned from this because of hedging.
But as we look to twenty twenty five, those will
wear off the business decisions on how to address it's
going to start to impact, and companies are going to
have to make longer term decisions to ensure secure supply
of commodities in light of what would be expected to
(23:16):
be incremental environmental pressure due to climate change. So I
think this is really going to resonate and be a
theme that crops up across a lot of industries as
we look out to twenty twenty five, but certainly food
and other commodity expost industries are going to be very
high on the list.
Speaker 1 (23:33):
Really interesting, and you mentioned the potential impact of threatened tariffs.
Are there any other potential changes with the new administration
that you're tracking?
Speaker 7 (23:42):
One really interesting unknown to me is going to be
despite all of the typical deeprade regulatory push that you
might see from a new Republican administration, how the Trump administration,
the second Trump administration enforces antitrust competitive anti competitive behaviors.
We've seen significantly ramped up enforcement throughout the Biden administration
(24:07):
with some high profile deals that had to be abandoned,
and I'm not sure it's a sure thing that that
goes away completely. While it probably does ease up and
particularly with a focus on tech. Maybe coming from different angles,
but it seems like there will still be quite a
lot of scrutiny on the tech industry moving forward. And
it's also worth mentioning no matter what happens in the US,
these are global companies and the scrutiny has not been
(24:29):
any less intense looking to other regions like Europe.
Speaker 1 (24:33):
Really really interesting, Gil, Thank you so much for your insights.
Thanks Margo. You've written a lot of research over the
last year on climate and within climate, of course, looking
specifically at how companies are setting carbon reduction targets, what
those targets mean. Curious ultimately to hear your thoughts on
the fact that many companies are setting carbon reduction targets
(24:55):
for twenty thirty as we approach twenty twenty five, you know,
only five years out from twenty thirty. Curious to hear
kind of what trends you're expecting with respect to target
setting going forward.
Speaker 9 (25:07):
Yeah. I have been looking at our bicarbon data set
a lot lately, which anyone can find on terminal at
bicarbon Go. It includes almost five hundred of the top
emitting companies, or sixty percent of emissions from listed companies,
and of those nearly eighty five percent have set carbon
reduction strategies for twenty thirty. These targets that have been
(25:30):
set do lack ambition, with only a third of those
targets in line with a one point five degree celsius
temperature a line benchmark for twenty thirty. And when we
look at the credibility of those targets, ie will these
companies meet them or not? There are some concerns whether
companies will meet their targets at all, regardless of their ambition,
(25:52):
which could suggest risk to investors. We have assessed the
credibility of carbon targets from a few key industries, with
more to come but for right now, looking at airlines, chemicals,
marine shipping, automobiles, E ANDP and cement, and we've found
that out of our two hundred and three company peer group,
(26:13):
twelve of these targets are credible, meaning those companies may
actually meet their targets in our view. But if those twelve,
only seven are in line with a one point five
degree aligned benchmark, which is only three percent of the
total strategies.
Speaker 1 (26:29):
Super interesting and certainly numbers that are not caused for optimism.
So maybe diving deeper into this idea of credibility, curious
to hear how you're ultimately assessing carbon target credibility and
is there anything that you're expecting from the credibility lens
as we move forward into twenty twenty five.
Speaker 9 (26:49):
Yeah. We took an industry specific approach, so looking at
exactly what do these companies in this industry do and
what do they need to decarbonize, what are the potential
pathways to reduce emissions? For example, for autos, we built
a model that calculates the number of battery electric vehicles
(27:09):
a company would need to sell in twenty thirty to
meet its tailpipe emissions target, and not to be too optimistic,
but none of those targets are credible. For airlines, we
built a model looking at how much sustainable aviation fuel
a company would need to meet their stated twenty thirty target,
and how does that sustainable aviation fuel target compare to
(27:32):
the company sustainable aviation target and we found that most
fall short and that there is a lack of staff
globally available. Anyways, Interestingly, we publish this analysis and a
few months later we saw Air New Zealand get rid
of its carbon reduction target because there isn't enough sustainable
aviation fuel available for them to meet their target. And
(27:54):
so let's bring it back to twenty twenty five. We
are approaching twenty thirty. We are five years out, which
may seem like a lot of time, but when we
consider what needs to be done by some of these
companies to meet their targets, which could include high capital
investment and technology buildouts, I think we could see more
companies dropping their targets or those targets being revised down
(28:16):
in some way next year, especially in industries considered harder
to abate or where solutions may be more feasible longer term.
So post twenty.
Speaker 1 (28:25):
Thirty really interesting stuff, Margot, thanks so much for the insights.
Th Thank you so Grace. You've spent a lot of
time focused on two key areas within the ESG conversation
over the year. One is nature and biodiversity and the
other is kind of all things sustainable finance, really what
banks are doing. So have a couple questions for you.
(28:48):
The first is what do you think the role of
banks is when it comes to nature and biodiversity and
how do you expect that to evolve?
Speaker 2 (28:57):
Yeah?
Speaker 8 (28:57):
Absolutely, I think nature loss is definitely an emerging era
of risk for banks. We've seen I guess previously climate
really dominating their agendas in terms of mistigating transition risks
with financial emissions targets, exclusions, sets, and high carbon sectors.
And actually a CDP study found that only twenty percent
of financial institutions are currently measuring their exposure to nature,
(29:19):
and that's versus eighty five percent, which calculate potential vulnerability
to kind of climate impacts. But I think we're beginning
to see banks consider things like deforestation and water use
and positioning statements, and I think we'll see this gain momentum,
particularly as regulations such as EU Deforestation Free Regulation comes
into force, which essentially prevents some companies with exposure to
(29:41):
deforestation from exposing products to the block. So for businesses,
biodiversity losses definitely bringing both kind of physical and transition risks,
whether it's for example, within their supply chain of its
disruptions or more scrutiny, and this of course creates transition
risk exposure for the banks that finance them. Banks that
we've kind of seen leading the way being like BMP,
(30:03):
Parry Bass and a chartered where they've implemented maybe more
advanced policies focusing on deforestation risk or commitments to zero deforestation,
and some have actually begun to introduce exclusions to clients
operating on recently cleared land and also pushing for better
practices and water and past side use. So I think
banks have a really key role in the nature gender,
(30:27):
particularly through integrating biodiversity considerations into financing and lending and
their risk management processes. And not only are they going
to be hedging their own risk, they can obviously influence
corporate behavior going forward. So I think we're seeing increasing
number of banks begin to consider things such as deforestation
and water use, and hopefully going forward it will evolve
to even more advanced policies to kind of mitigate impacts
(30:49):
on nature.
Speaker 1 (30:51):
Very interesting, and I think you know, in the estory space,
we've talked a lot about ultimately how banks can enable
the climate transition or energy transition. Curious to hear your
thoughts on how banks can enable a transition to a
more nature positive economy.
Speaker 6 (31:07):
Yeah.
Speaker 8 (31:07):
Absolutely, I think scaling finance to biodiversity has been a
substantial challenge, so banks are going to play a critical
role in accelerating the transition to a more nature positive economy.
Use the stat yesterday are Conference that the World Economic
Firm estimates that transitioning to a more nature positive economy
could up unlock up to ten trillion dollars in business opportunities.
(31:31):
So this essentially presents new revenue streams for banks much
in the same way that we've seen them financing low
carbon clients. Also these clients that are doing things to
drive a more nature positive economy, and we see five
key kind of frontiers where there are opportunities for financing
across cycle economy, water solutions, sustainable materials, land management, and
(31:53):
nature data. So I think banks will be really critical
in scaling financing towards these areas.
Speaker 5 (31:59):
I think we'll also we.
Speaker 8 (32:00):
See an expansion of banks biderversity related product offerings we've
seen and also their fixed income assurance expanding BBVA for example,
and the International Finance Corporation issued a fifteen million dollar
fust chance of our world's first bid diversity born earlier
this year, so hope we will see that momentum continue.
And another area we've seen banks become increasingly involved in
(32:22):
is depth and nature swaps. So there's an estimated two
trillion dollars of developing country debt that we may be
eligible for depth for nature swaps. That's according to the
nature constitracy. So we expect this trend to really accelerate.
In twenty twenty five, Gold and Sacks in macrom America
working on a swap for Ecuador to product part of
the Amazon rainforest. Sanachatid has a swap in the pipeline,
(32:45):
and BNP has been exploring various deals. So I definitely
think we'll see this trend going forward, and I think
we'll see banks just increasingly engaged in nature and nature
specific product offerings to kind of capture the growing demand
for biderverse financing game.
Speaker 1 (33:00):
Forward really really interesting, Grace, Thank you so much for
sharing your insights. Thank you, Chris. Curious to hear your
thoughts on the sustainable debt markets as we enter a
second term for Trump.
Speaker 6 (33:14):
Yeah, thanks Eric. I don't believe the market overall will
be greatly impacted by the Trump administration. You know, financing
means of vital and necessary part of governments, supernationals and
corporations goals to achieve their sustainability targets. And I think
the green social sustainability. Bond market continues to offer a
(33:36):
great source of capital for these entities. We've seen an
average of over one point six trillion in debt utilized
by these issuers over the past four years. And you know,
let's not forget we saw tremendous growth during the first
Trump administration as the market was still really trying to
gain traction. So I don't think this second term should
do much to deter issuance. Many of the programs that
(33:58):
are out there currently too in the form of the
IRA should remain in place and continue to support the market.
But if some of these programs are threatened, we could
just see issuance get pulled forward as people try to
still take advantage of them before they get pulled. So,
you know, I still believe that the system of debt
market will remain an integral part of the overall debt market.
Speaker 1 (34:22):
Interesting, So, does that mean you're expecting issuance to grow
next year or could there be still some slowing in
issuance from the market for related reasons.
Speaker 6 (34:32):
Well, I think if you look at this year, number one,
you see the issuance was at record levels. Now there
was a reclassification of Jenny May's single family mortgages that
goes back to twenty twenty three when they establish their
social bond principles, So that accounts for over four hundred
billion additional labeled social bond issuance, but without it would
still be around twenty twenty three levels of roughly one
(34:55):
point six billion, So it still would have been a
great year overall this year, and that's kind of a
very positive point that, you know, the market continues to
be strong, So for twenty twenty five, I would expect
issues to be kind of similar levels as we've seen
strength come from a lot of areas such as sovereign issuance,
with most still committed to issuing annually and other sovereigns
(35:19):
still enter the market. We've also seen continued strong issuments
from supernationals like the World Bank and IDB, and utilities
are at recorditionments levels as well as they address a
lot of their sustainability needs and really focusing on fixing
the grid. So barring any dramatic changes to the market,
like interest rate hikes steming from wrapping inflation, you know,
(35:43):
we've heard some people that are worried about rapid inflation
as a result of expansive teriffs. But you know, barring
any type of drastic change to interest rates, then you know,
I feel very confident that Issues should exceed the one
point six trillion again in twenty twenty five and could
potentially break to two trillion market.
Speaker 1 (36:02):
Really interesting, Chris, thank you so much for joining me.
Speaker 6 (36:05):
Yeah, glad I could be part of it, Eric appreciate it.
Speaker 1 (36:08):
In terms of my expectations for the year ahead, I
guess I'll start by saying there's going to be a
lot of noise, especially here in the US. We'll see
a lot of talk about regulation and efforts to claw
back momentum on a variety of fronts, including climate, labor,
and diversity. I believe we're going to see continued debate
around the term ESG and its value. We're going to
(36:29):
see companies leaving ESG related alliances and scaling back on
various targets and commitments. And while all this can have
an impact, I'll repeat what I've often said, which is,
regardless of labels and politics, the underlying ESG issues will
continue to impact companies, industries, and markets. On today's episode,
(36:50):
we heard many tangible examples of how issues like climate,
water cybersecurity and supply chain will continue to create risk
and opportunity, and the team I look forward to providing
more research on these topics and much more going forward.
Thank you to the team for joining today's episode, and
Asah mentioned in the intro, this will be our last
(37:10):
episode of twenty twenty four. We wish you all a
happy holiday season and we look forward to returning to
our weekly episode Cadence in twenty twenty five. In the meantime,
as always, you can find more information on all things
ESG by going to our dashboard bispace ESG go on
the Bloomberg terminal, and if you have an ESG quandary
(37:30):
or burning question you would like to ask bi's expert analysts,
please send us an email at ESG Currents at Bloomberg
dot net. Thank you so much, and we'll see you
next time.
Host
Eric Kane
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