Credit Suisse Sustainability, Research and Investment Solutions CEO on the ESG Landscape Ahead of COP26: "Everything is Going Global and with a Focus on Climate"

There is an "enormous amount of momentum" leading up to the UN Climate Change Conference of the Parties (COP 26) in Glasgow this November with governments in different regions "getting into the business of being a force for disclosure," says Lydie Hudson, CEO of Sustainability, Research and Investment, Credit Suisse in the latest episode of CERAWeek Conversations.

In a conversation with Atul Arya, IHS Markit Senior Vice President and Chief Energy Strategist, Hudson says "disclosure is good for capital markets, disclosure is good for investors; it leads to transparency." While the thrust of disclosure continues to be around climate and climate change, Hudson says that COVID-19 and social unrest of the past year "really pushed the social topic to be almost equal to some of the environmental topics."

Younger generations will increasingly drive this ESG momentum, Hudson says. "One of the greatest wealth transfers in history is happening or about to happen. The younger generation will be taking up money to invest and they'll be looking more on ESG factors overall. ESG is much higher on the water fall for the younger generation that is coming."

Hudson also shares her thoughts on the U.S Securities and Exchange Commission's forthcoming rules on climate risks and financial disclosures; pursuing "just energy transitions" that account for differences between the developed and developing worlds; and the future evolution of the corporate ESG movement.

"We know that the transition is going to be hard, take a long time and likely be messy," she says. "But endeavoring on it with transparency and engagement is quite important and I expect that to persist."

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Selected excerpts:

Interview Recorded Monday, August 30, 2021

(Edited slightly for brevity only)

• On the global momentum behind corporate climate and sustainability performance disclosures:
  
  "Leading up to COP26 you're continuing to see an enormous amount of momentum around disclosure and with governments in different regions getting into the business of being a force for disclosure. Whereas this had started from an investor perspective with a significant amount of activity from a few large asset management firms in particular, what you are seeing and hearing now, in particular from the U.S. with SEC Chair Gensler announcing the intention to mandate disclosure on climate risks with a new rule by the end of 2021, the European Commission continues on their work which is under the directive on corporate sustainability of reporting, and the Swiss Federal Council also decided on parameters for climate reporting as well. The underlying trend is: Disclosure is good for capital markets; disclosure is good for investors; it leads to transparency. The thrust of disclosure continues to be around climate and climate change. This is where we know many investors look at this from a risk perspective. Everything is going global and with a focus on climate."

• On the growing focus on social strategies within corporate cultures:
  
  "It's become quite clear how much client appetite there is to really understand social topics and how they relate to corporate performance and underlying investment performance. COVID made clear how fragile parts of our society are, how fragile parts of our healthcare systems are. And we saw a tremendous amount of social unrest last year as it relates to racial issues. This combination of health issues, of employee issues for corporations, and those issues including diversity and inclusion really pushed the social topic to be almost equal to some of the environmental topics over the last year. That was probably unpredictable pre-COVID. It came about most likely because of the tremendous strain on society that COVID has introduced. We recognize this in our research enterprise how much this topic was really here and how clients and investors want to engage on this."
  
  "Last summer there was a reckoning where social issues really came to the top of the agenda. They are perpetuated there. The headlines haven't followed as much in the past few months, but I think it's in the boardrooms. I know that the investor community maintains their focus on social topics. And you're even seeing the application of some of these topics embedded into some of the mandates, whether it's NASDAQ on board diversity or other pronouncements that have been asked in terms of how people think about governance topics as well. You're seeing some of the social topics bob and weave across social and governance but really at the corporate level. That will probably perpetuate. Having a good approach to social strategy for your firm also embedded with governance likely will not go away. It's very hard to achieve some of the ambitions that have already been stated. This is going to take long-term commitment and something that you measure in years, not days or weeks."

• On the importance of ESG performance for the next-generation workforce:
  
  "One of the greatest wealth transfers in history is happening or about to happen. The younger generation will be taking up money to invest and they'll be looking more on ESG factors overall. ESG is much higher on the water fall for the younger generation that is coming. The great shakeup of COVID?on a longer timescale than we had predicted?the whole balance around health, wellness and work life continues to shift and change and certain demographics feel the heat of that issue more acutely. In general, we know that diverse populations have felt the brunt of COVID at their employers more than non-diverse populations. How do we persevere through that, so we are building back better indeed? The time scale has become elongated because of the length of COVID and it's really going to come down to corporations putting good plans in place to persevere through this."

• On holistic approaches companies are taking to integrate environmental and social strategies into their operating models:
  
  "If you think about the ESG ambitions of an organization and someone trying to deliver on Paris, they have to have considered the social factors and the social implications of delivering on an environmental strategy that gets to some sort of net zero or decarbonization effort. That means you have to think through the type of staffing you have, the type of employee engagement you have, and all the ancillary topics that will enable a transition pathway on climate sensitive sectors or climate sensitive business strategies. Depending on what your workforce looks like, depending on what your operating model is and what type of assets you're working with, the training your people need, the education, the communities in which you're operating and how you might have to change the hard assets that you have, you're going to have to think through your social strategy, your human capital strategy, and all the related components."
  
  "Social strategy has been in the mix for most employers for a long time and in fact most corporations recognize the need to engage with the societies in which they operate. And yet here we are in this massive transition point where many people have very ambitious environmental and climate ambitions and it really goes to show you that you have to have a proper and well thought out social strategy that goes along and in parallel with the societies and the locations that you're operating in, with the employees that you're operating with."
  
  "There's lots of ways to think about social. I always like to first look at how we might be evaluated by relevant stakeholders. That can be alongside of thinking and considering what an organization's policy is around their staff and labor standards. Then there's employee safety and health protection which can go in the space of healthcare and wellness and perks, but also minimum standards for safety and health protection. You can get into D&I and training and education. There's a lot of discussion about supply chains and using the power of your own purse to consider your supply chain and how your supply chain has cascade effects on either climate or on diversity and inclusion standards or on worker health and safety topics."

• On the concept of "just energy transitions:"
  
  "Particularly in the Western world there's differences to how we interpret this challenge versus in the developing world. There's lots of ways to talk about this but it's quite complex. There's the expression ?all politics are local;' all transitions are local. The energy transition for some people still means getting electricity and we don't want to stand in the way of that progress and what that means versus decarbonizing an organization in the Western world is very different."

• On collaborations among financial service providers to align climate ambitions ahead of COP26:
  
  "You're really seeing the financial institutions coming together to share best practices and endeavor to recognize how complex this is, but also be very centric to the idea that we need to assist our clients' transition and we ourselves have necessities to change our own business model to achieve our own net zero ambitions. A lot of collaboration and partnership with the highest levels of financial service leadership and management."
  
  "There is already good communication with governments and regulators that probably hadn't even existed at Paris in the same sort of scale and magnitude. There is already a good dialogue. I expect that to continue and to become more sophisticated as time goes by, not just for COP26 but for the foreseeable future."

• On the U.S. Securities and Exchange Commission's forthcoming rules on climate risks and financial disclosures:
  
  Ultimately this is about risk disclosure. It's about understanding risk profile so that various stakeholders, whether it's investors or regulators, can understand the fragility or strength of a company and how much exposure they have to sensitivity around climate. That was a great step forward so that it's not just a discussion about climate change or climate change business strategy. We all can talk in topics of risk and how we should interpret what our balance sheets look like and how much climate sensitivity is on balance sheet. We can all agree that's an important idea and an important set of information for our investors to have at their disposal?for them to be able to understand the risk element of our business model. It's just another sleeve of risk management. It's quite hard, the data is novel, and it's not organized as much as we as an industry would want it to be. It's a massive effort to do this, I don't want to underestimate it. But in the future, it will look very much like other types of risks we manage once that data infrastructure is built up.

• On future trends and what to expect in the evolving corporate ESG movement:
  
  "COVID has continued to crystallize the importance of social factors across the boardroom agendas. That isn't something we would have predicted 12 or 18 months ago. But that will perpetuate as we continue to see fragility in all of our businesses based on how we persevere through the COVID recovery. Overall, ESG is maintaining its relevance in being a filter through which different stakeholders can assess a company and an organization. It is not always sufficient, but it's an important lens. And it's a lens that employees just as much as investors or regulators want to access. It's important to have a coherent and systematic approach to ESG. It's important to set ambitious goals that you can credibly execute on and disclosure and transparency are very important. For certain, we know that the transition is going to be hard, take a long time and likely be messy. That will lead to challenges in the boardroom in the actual plant, in the operations, and with different stakeholders. But endeavoring on it with transparency and engagement is quite important and I expect that to persist."

Watch the complete video at: https://ondemand.ceraweek.com/cwc

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About CERAWeek Conversations:

CERAWeek Conversations features original interviews and discussion with energy industry leaders, government officials and policymakers, leaders from the technology, financial and industrial communities?and energy technology innovators.

The series is produced by the team responsible for the world's preeminent energy conference, CERAWeek by IHS Markit.

The complete episode library is available at https://ondemand.ceraweek.com/cwc.

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