 Greetings, my name is Christy Bear and I'm the assistant director of the Center on Finance Law and Policy. I am thrilled to welcome you back to our monthly blue bag lunch talk. Today our speaker is Peter Adriens and before I tell you about him you know that I am not happy until I have a chance to plug other Center on Finance Law and Policy activities and so next Monday I want to let you know that we are sponsoring a panel that's part of UM Africa week. It's called Fintech in an African context and we have some very cool found the founder of Migo Money, the founder of M-Pesa, the founder of I mean sorry and the former governor of the central bank of Nigeria all on the panel. So anyway it should be pretty good. I hope you'll come. If you click on that link then that's where you will register. So please join us for that. But today we're here to talk about environmental finance. Let me tell you about Peter Adriens. Peter is the person at the University that you reach out to when you want to make something happen and so if you look back through his bio he has found he is one of the co-founders of the University's Fintech Collaboratory. He's the founding director of the Center for Smart Infrastructure Finance. He has appointments at Ross Engineering, SEAS like he knows everybody. This is the guy that you want to know. His research focuses on data-driven digital business and finance models and specifically he looks at blockchain applications, smart cities, infrastructure and how to use technology to advance public financing for the greater good. So this term he's teaching an entrepreneurial business fundamentals class and a class on infrastructure finance and I also have to plug for a minute the new masters of engineering in infrastructure finance. So if you understood half of the things that I just talked about you're in for a treat and if you don't then that's okay too because the other thing that I like about Peter is that he can explain complicated things in a straightforward way which is the hallmark of a good teacher. So without further delay Professor Adriens I'll leave it to you. Well thank you very much Christy great introduction and great to see everyone here online. Of course it takes about 30 years to get to know everyone on campus so I'm going to have been around long enough to find the people in engineering and the business school SEAS and the School for Public Policy right? I mean as Christy mentioned I am co-founder together with the Center for Finance Law and Policy Michael Christy and Adrian Harris at Public Policy as well as our colleagues at the Business School and the Fintech Initiative in this whole new Collaboratory but that's actually not what I'm going to be talking about today. So I do have a course that I'm teaching in fall also on environmental finance and so this whole you know kind of integration between environmental finance and as we'll see in a little bit infrastructure and data and how things are moving forward in the current day and age I guess of you know new sustainability scrutiny in the financial markets is becoming very relevant to the topic of today. I should mention most of the the the topical areas it's going to be a bit of a finance talk though I promise no equations I'm going to have some charts but we're going to keep the modeling out of it but the two of the topics that I'm going to be referring to relate to a collaboration that we currently have with Nuvine. Nuvine is the investment arm of TIAA. TIAA of course is the teacher's pension fund of which the University of Michigan is the largest client and so they're also a major driver in in the sustainability space actually since 1989 before the modern definition of what sustainability was so they've been in the business for a long time and I'm going to be talking a bit about some of the work that we're doing in one of my one of my start-ups e-queries risk analytics related to this environmental or to the sustainability scrutiny so first off what is sustainability scrutiny let me see if I can can everybody see this yet or not yet let me go into is this forwarding for you or not yes we're good all right yes um so let's start with a couple of recent headlines and I'm trying to manage my gallery here recent headlines that many of you may have seen may have read most recently I mean the US was a little bit later to the game as as a relative to to Europe but the Fed chair Powell says central banks must help address climate change because of implications on monetary policy bank regulation financial stability is sustainable business and finance just just a couple of days ago a big statement coming up investors are finally waking up to the SDGs the sustainable development goals but sort of question is how do we quantify risk how do you quantify risk from ESGs a big elephant in a room and then three out of environmental finance which is a blog I use very often not only my classes but also my research that actually investors are starting to use in finance you're starting to use ESG data environmental social and governance data as almost the canary in the coal mine for credit rating so for you know your your standard imports or moody's credit rating so so the sort of this this connection that's being talked about between climate and sustainability and financial stability and financial regulation and whatnot and it's still a very confusing at this point a very confusing topic because financial materiality is not very often sort of linked into this whole sustainability discussion a lot of it is still about we got to do better we got to develop sustainable practices it's good for long-term growth it's good for your stability and whatnot what I wanted to do is a little bit more scrutiny and go a little bit deeper on how all this sustainability links into sustainability conversations link into materiality link into issues around not just climate change but sustainability more broadly so and let me start out with the financial stability board there's not too many of you may be familiar with the financial stability board financial stability board was essentially put together in 2009 after the last financial crisis by the G20 at the Pittsburgh meeting at that time and so basically the whole idea was well let's set up a board and figure out I guess how we can standardize not yet climate but in general other risk disclosures that are currently not being disclosed by either corporates or other players in the market by 2005 the the financial stability board launched a task force on climate related financial disclosures because as you see here on the left the argument is that climate related risks are a source of financial risk and it's being talked about as you just saw in the headlines over and over again and the argument is if it is a source of financial risk in a core and a source of market risk it falls squarely in the mandates of central banks of supervisors to ensure that the financial system is resilient to these risks now the big question is that might be true as a statement the big question is how do you actually then quantify that or how much of an impact does climate change and all these ESG and sustainability disclosures that that corporations as well as public governments are issuing how well are they related to financial risk and how do we quantify the how do we look at so the perturbations of these financial risks in the market on the right I mentioned that you know my climate related risk is non-diversifiable so it's not easy for a corporation global corporations that are currently operating in a market to diversify away from climate risk because one way or another whether it's through water whether it's through temperature whether it's through droughts or storms or whatever you are exposed and therefore there is a financial impact now there just to be sure there are currently no mandatory disclosures so even that the task was a climate related disclosure this is not a mandatory disclosure it is a it is a suggested disclosure on how how corporations should keep track of how their operations and performance are being impacted by climate change and so we're looking at issues such as revenues by of the company I mean how stable are those expenditures assets and liabilities and of course in assets and liabilities in the context of carbon we talk a lot about stranded assets right so a lot a lot about facilities of corporations that cannot maintain or continue productivity under current either carbon guidance but also cannot maintain productivity as a result of of water impacts as a result of climate I'm going to talk a little bit about that as well and then of course there is the whole question regarding you know is climate impacting you know how how corporations as well as banks actually finance finance new projects and new programs so so there is a guidance structure here and this kind of gives you a very high level 30 000 foot overview right so we're basically we're looking at on the one hand all the risks I guess that corporations and I'm going to be extending it also to local governments later on in my talk but are impacted by policy and legal technology technology deployment or or technology non-deployment market risks right market risks the whole perception around climate change and how that's impacting customer base and then of course the whole I mean reputational and and and other risks on the other hand we have the the new opportunities right the opportunities of resource efficiency a lot of talk about resource efficiency I'm going to talk a little bit about resource water usage and consumption but also energy sources that are being procured most recently even though I didn't help him write the Keystone pipeline some of you heard about that that of course he was allowed under to proceed under the Trump administration as soon as Biden came in office on day one he killed off the Keystone pipeline Keystone responded right away and said wait wait we're going to be pumping all our oil through this pipeline using renewable energy well it wasn't enough to to actually make a difference I mean the project is still not not moving forward but so the use of of you know how how new energy sources are being used in corporations and in projects are all sort of new opportunities for corporations to actually respond to the risks on the left right but of course all of these have financial impact from an income perspective from a cash flow perspective and from a balance sheet perspective and that in turn has an impact on the capital markets and on how one discloses once once risks so the what I'm going to be probing here a little bit is well we don't really have standardized or benchmarked ways to disclose this information and if there is no benchmark or no standard neither the Securities and Exchange Commission nor any other organization is going to mandate that corporations are going to be disclosing these kind of risks because as I said there is really no common standard at this point so we're still very much in the exploratory stage the good thing is that information is starting to pop up right and so so let's talk about ESG because whereas some of you may have heard about TC at TCFD I don't know TCDF I guess I got dyslexic here for a little bit so task force and climate related disclosures actually has a relationship to ESG and many more of you may be familiar with ESG which is an equally confusing concept that is sort of all the aspirations I guess that corporations and different aspirations by by industry sectors have on how they will either disclose the risks or manage the risks but again there is no benchmark I mean you look at them in Thomson Reuters you look at MSCI you look at Sustainalytics you look at all these different you know ratings providers and they're all going to look at ESG ratings which are in many ways tied to you know to to climate and to social and to risk management and to governance of the operation it's not again not standardized right so if if neither TCDF is required or standardized nor ESG being standardized or required then how on earth are we going to bring the two of them together and say we have to disclose our our material risks well what is the what is then the baseline right I mean both of them are related but both are equally poorly specified I mean despite the fact that now we have a sustainable um um hello the standards board in in California that's trying to standardize how we disclose ESG risks and and despite the guidance that comes from the financial stability board through the TCFD on how we disclose metrics and targets risk management strategies strategy and governance the big question is are these ratings even if they're connected these ratings that might relate to your TCFD a good measure of material risk or returns right so that's ultimately what we want to probe right it's that that that scrutiny in the markets has to at some point boil down not to what we call metrics creep you know again talking about this here ESG ratings you see I mean a lot of pizza that's sliced up in many different ways so we have ratings providers that come up with more and more metrics the question is are they materially relevant and if they're not then we're running into problems in how we're going to be disclosing information that we need to disclose so what's this financial scrutiny that I'm talking about here two things and two things that are very related right so one do risk disclosures condition capital for sustainable investment and conditioning capital for sustainable investment really means is capital that gets used to invest in companies in projects in different sectors whether it be it's agriculture or mining or whatever it might be does does that take into account these ESG or sustainability risk disclosures or do the sustainability risk disclosures provide a financial incentive for corporate sustainability corporations disclose a lot too but how material is it to the company so how material is it to investment to the investment side and how material is it to to the corporation so I want to sort of go beyond saying we need to disclose everything to saying well it's important that we understand what the matter reality is what the impact is of these of these disclosures so connecting the two dots that the capital side and the corporate side and for those though I didn't put the link in here but this sort of evolved out of a conversation that I I had for a long time with John Allen at the School of Environment Sustainability Ravi Anupindi at the Ross School of Business and that we essentially structured as a talk for Earth Day at 50 last March so almost a year ago we did talk about conditioning sustainable conditioning of capital and that the talk is actually available online so let's talk a little bit about this and we're going to start sort of at a at a top level here right so does ESG scoring have financial materiality and the indicators and these are indicated this this is 2016 through 2019 these are not my data this is from MSCI MSCI is a is a an index provider but MSCI spun out of Morgan Stanley that's what the MS stands for spun out in almost 20 years more than 20 years ago and they look at risk right but they also have a group called the ESG research group within MSCI so they set up sustainable indexing and they've been looking at sort of sustainability for a very long time for about 20 years in from a financial side so not from an environmental disclosure side not from a total tons of carbon or total acre feed or square or cubic kilometers of water or from biodiversity but really looking at this through a financial lens right and what we see here are sort of three pieces of information on cost of cost of capital and this is this is the the cost at which the cost to a corporation to get debt I guess acquire debt from banks or or to sell their shares in the market and get the returns from that and what it lists here what it compares here companies that have a low ESG rating and companies that have a high ESG rating and they got the other quartiles in between right so this is the bottom actually bottom quintile right the top quintile and you got the other ones in between here right and this is for the USA for Europe Japan so total cost of capital cost of equity and cost of debt so so the debt is probably easier the easiest to understand for most of the audience that is if a corporation wants to expand right build a new facility expanded operations and whatnot and it goes to the debt markets to actually get a loan the debt market to whomever the bank is the investment bank is looks at the corporation looks at where they're going to be putting that that facility but also looks at how that company manages it manages its risk and what we're seeing for example just here on the right right between dark blue and orange that there is a significant impact of whether a company is is I guess completely transparent in disclosing its ESG risks or not disclosing or very poor poor or not disclosing its ESG ESG risks i.e. the cost of debt is lower for a higher ESG rated company for a lower ESG rated company as I said these are data from that were currently available 2016 through 2019 we're going to keep 2020 for now out of any kind of financial analysis because as we have learned I mean it's going to be quite an anomaly in every every forthcoming analysis so and the reason for that is that that high ESG rated companies I mean companies that disclose and understand a lot of their factors that they are exposed to that expose their their future growth their future revenue their future operational capacity of facilities their future maintenance of their assets and whatnot I actually have more resiliency the more resiliency to to future I mean climate and social and other types of impacts under operations right so higher ESG rated companies tend to be less exposed to systematic risks than low ESG rated companies this isn't just climate this is right now just this is ESG and ESG has ESG in it so e the climate technically would fit in e right under the environmental however climate means more than carbon we very often tend to take a very reductionist approach and look at climate as being carbon climate is much more than carbon because it looks also about where you operate how you operate how you engage with the community where you operate etc etc but what we're seeing is that these high ESG rated companies are less exposed and therefore they're rewarded by the market in actually having to pay less for their debt right so that's a great sort of initial step so there is actually some materiality in disclosing that information to the market so so let's look at let's drill this down because ESG is sort of everything but the kitchen sink as you just saw before right it is all the factors when you got the three pillars you got the e the s and g and under e under s and under g you got multiple different factors that are measured in many different ways so so there is sort of a lot of uncertainty in looking at that bucket bucket of data so let's look at one specific one for example just water risk and frankly i mean i am very involved in water risk and when i go to climate conference or investor conferences many investors now will look at climate through a water risk lens because they say water risk is local you can say a corporation has a certain exposure a carbon exposure but its water exposure is very local based on is the facility in the u.s exposed the facility the northeast south south the southwest uh central america europe south africa where are its operations right so they're going to these very specific localities gives you and they're looking at the weather impacts and the climate impacts both of them in these regions sort of gives you a reading on potentially where the water risk exposures are and here's some data so cdp which is a nonprofit out of in london actually they're also in new york cdp stands for carbon disclosure project it started as a carbon disclosure project but they have actually a water disclosure group within cdp so they look at the water report and so some some ideas here 75 percent the largest reporting companies identify high higher water risks year and year and high water risk is both a risk from the perspective how much you use the quality that you use the access that you have to it the competition that you have with other water users etc etc etc right and so you see some numbers here on on financial impact right but the question is i mean this financial impact is sort of calculated by others right that is not really a disclosure necessarily by the company as in you know we have this much less that we could be producing it's sort of more an analysis by the financial markets of for example mining companies or power companies or biotech and other companies on how water is impacting first different operations the question is would it be rewarded would the company be rewarded if it makes an investment in water risk as part of esg and as part of tcfd right is is is it rewarded when it makes that that investment and so one of the things that we've been looking at is something called a water beta because again when i talk about the capital markets i mean initially we're going to be talking about it from the perspective of of the investment community that looks at these companies and then engages with these companies and say hey you've got a problem in this locality that locality with that particular plant and whatnot and so we formulated something called water beta this is done with a a lot of partners including msci including morgan stanley including more recently nasdaq and other types of of organizations we will look at how much volatility in share price and how much premium in share price could be realized by a corporation if it manages the volatility that is caused by water i.e indirectly through climate change um climate change impacts and beyond so water beta is something that we kind of map as a as a risk here right relative to financial beta and by the way beta what when you say beta in the financial markets it automatically means volatility it automatically means risk so financial beta is really about the system the systematic risk so risk that every company is exposed to relative to the global market and water beta is a specific company's risk relative or related to water relative to its index right so now we can start seeing that different kinds of companies right so basically above one means you're more more volatile than the market below one you're less volatile than the market and then here you have a range too so now here depends on what industry you belong to whether you're you have high water risk you got low water risk and it impacts your performance on the capital markets so healthcare you know as a different impact uh impacts impacted by a lot of water risk oil and gas uh food and beverage more so than than than systematic risk financials impacted more by systematic risk you look at our companies like mining companies and energy companies a lot of global market risk and and um and water risk right so it becomes kind of a way to triage your companies in the capital markets and here's something I forgot to say because most in the audience probably come from or think about uh you know we need better policy to regulate and govern our corporations and I don't disagree with that however the the the the the tax that we have taken sort of following TCFD is no no no no let's look at where the market signal is is there a market signal that would prompt a company to become more sustainable as opposed to a policy signal that forces a company to become more sustainable it's kind of like you know the stick in the carrot that we're trying to bring together so if we look historically at before at the performance of companies in these different spaces if we look at an at an index so benchmark for example uh the um this is a this is an index of companies where we incorporate water risk in how you allocate companies in a bucket of companies that banks invest in or pension funds invest in so basically companies with high water risk we allocate less off and companies with low water risk we allocate more off and of course this changes every quarter this changes every year what we see is we have a a constant outperformance when we take into account water risk relative to the benchmark and it started breaking out around i mean the date is not on here because it's kind of a cartoonist version of the real data around about 2013 or so 2013 is when we started seeing a separation of water really becoming an additional risk factor that the market started looking at relative to the benchmark in the benchmark in this case is an is an index that is not adjusted for water risk so water risk actually commands a risk premium right over and above all the other risks that corp that companies are exposed to and so the water beta that volatility risk is essentially kind of that difference between the benchmark and the and the water risk adjusted water the new water risk adjusted benchmark so the question you're asking probably is now why is this line higher than that line because this is performance right this is return so why is a high water risk index better performing uh-huh because we discounted the companies that at high water risk and we essentially put a premium on the companies that have a low water risk and that's why you get an outperformance i mean in fact we can start seeing that depending on a company and i'm just going to disclose one here because we're starting to work a lot with the japanese so japan and europe the japanese market and the european market are very bought into disclosing their risks to the tcfd american companies are not that much bought into that yet i mean it's coming but they're not quite there yet so it's mainly the japanese and the and the european markets and so when you look at it this is asahi some of you might know asahi from asahi beer right so so they command a an additional premium share price premium about three percent over the benchmark by managing their water risk right so you can start seeing financial matter reality so far not just in borrowing money from the market but also a share price premium that you can command in the market and so a lot of that so esg is nice but esg and and and tcfd related to financial metrics really drive market forces right let's move forward um so let's look at uh let me move forward to to green bond so let's look at actually this title here carried over apologize for that so what about the fixed income market so let's move from the stock market to the fixed income market because many corporations they issue bonds right sometimes they just issue plain vanilla bonds and sometimes they issue um uh green bonds right we've seen a lot more green bonds including from microsoft and amazon and other companies the big question is is there a benefit in doing that aside from having a green bond i mean does it have a carry a market premium all i'm showing here is so what this should say is what is the impact on the uh on the the fixed income market so green let's first look at at the green bonds so green bonds are issued both by government governments and by corporations and right now we're just going to worry about the corporations when we look at the corporations what is a lot of that invested in now you can look at well so that the percentages of where the green bonds are actually invested in and this looks great when we have investment of green bonds in transportation in buildings buildings and energy in in water transportation all of that so i mean this is fantastic the problem is the green bond market is still only a couple of percent of the total bond market so part of the problem that we do not have more green bonds than we should have i mean it's 400 billion right about 400 billion but there is close to you know 80 trillion in uh in in bonds overall right so it's still a very small percent so one of the challenges is that perception of higher cost for issuers so this is an interesting thing too on materiality so if one can demonstrate that a green bond not only looks great for a company to issue because you're investing in green technology and in everything else that's sustainability if there is actually a market signal that tells you that you know what it's not only good for you from a you know from a marketing perspective it's also good for you from a from an issuance perspective from a cost perspective now we're looking again at financial materiality and we're starting to see some of that these are early data and this is just data over over almost about a year these are not hours so the materiality in the green bond yield so one of the ways of looking at green bond performance and cost is by looking at the yield to the yield spread so basically the more volatile the more volatile a bond or riskier the more risky a bond the higher the yield would be right so what we're starting to see is over time that the spread of conventional bond yields over over green bond yields is starting to starting to decrease so the basis points are starting to decrease so so what happens is that that essentially over time we're starting to see that green bonds are becoming cheaper than vanilla bonds than non-green bonds even though the underlying risk is the same I mean if I'm a corporation and I want to issue a green bond versus a regular bond the risk of the bond is essentially the price of the bond the credit rating I'm getting for the bond is going to be the same because the credit rating is based on the credit of the credit rating of the company so if I'm apple and I issue a regular bond I issue a green bond it's all based the interest rate that you pay is all based on the on the risk of of the company itself so it doesn't really matter whether it's green or not where it does become important is what the demand is for these bonds right so the demand for the bonds is going to sort of drive kind of that that risk premium and hopefully drive the risk premium lower so what we want to see is that the yield goes down that we get a lot more demand for green bonds and that basically investors perceive green bonds to be less risky and other bonds so here here we see the difference so this corporate ESG score matters so now we look at green bonds where we layer on top of that whether or not the company is a high ESG scoring company or a low ESG score scoring company so when you're a low ESG let's first do the highest G scoring company when you're high ESG scoring company what we see over here is that the yield of the let me see a oops a lower yield of of the of a green bond for high ESG scoring companies that what we see for low ESG scoring companies so basically if you're a company that does not disclose any of its ESG risk and you're issuing a bond you're not going to have as much demand for your bond whereas if you are a company that is a high score of ESG risks and you issue a green bond there's going to be much more demand for your bond when there's much more demand for the bond what's going to happen is that the yield of the bond the yield is is inverse to the demand right so when there's a lot of demand for a bond the yield will go down and actually the bond becomes cheaper over time and less risky over time which is a great market signal because it tells you look disclosure ESG risks issue green bonds and over time your bond will become more attractive to it will become attractive to investors there's a lot of demand from investors and becomes cheaper to the to the payer so we wanted to go beyond that and say you know what the green bonds are only two percent of the total bond market there is a little more bonds out there right that are vanilla bonds and so this has worked out one of my students is doing one of my students Dan Lee is doing and she's looking at at the the plain vanilla bonds so mainstreaming green bonds so we're going to go to the vanilla bonds we went beyond green bonds only the ones that are triple b rated or higher right and we wanted to see if you just issue any kind of bond and you just you disclose your ESG risk or you do not disclose your ESG risk so we actually set the bar lower than before remember before we had a green bond and we had high and low ESG rating so now we have a non-green bond a plain vanilla bond and we're looking at do you disclose your ESG risks or do you not disclose your ESG risks and what we're starting to see so we looked at all bonds that were issued over the past 15 20 years across all these different sectors of the economy and one of the things that we started to see is a is a change again in how the bonds are being perceived just by companies that are disclosing their ESG risk so basically telling the market that you understand what your environmental social and government risks are actually gives you a 10 basis point decrease on the spread or on the risk of your bond which is great right because it's again a market signal where you disclose your ESG risk the market response you have a lot of buyers and investors that want your bond because of a lot of high demand for that bond the yield spread goes down the risk goes down right and so therefore the cost of that bond goes down so and there is a bit of a difference at the time of issue at the time of issue we have plus numbers and after we have negative numbers why is that well it's kind of like you know issuing all your risks to the tax man right the more you disclose the riskier you appear right to finish at the time of issue of the the bond you know the bond is viewed to be more risky but then after you start trading when people understand I guess and and the liquidity of that bond over time people start understanding how our corporation is managing its risk the the risk of the yield goes down so basically what it says is ESG disclosure results in a lower risk bond after trading so again we have a positive signal we have a positive signal from ESG disclosure on your performance in the in the in the your share price performance in the market on the borrowing costs for debt on the bonds that you're issuing so so far it's all positive that's part of your materiality so now I want to just go to something that goes beyond the corporates and the corporate the the municipal the public sector doesn't fit within TCFD I just have one two more slides here so these are the municipal bonds so these are a whole different set right so those not familiar with the municipal bonds this is sort of our universe in which municipal bonds have invested in over time right municipal bonds are are a very significant fraction of the total bond market and that's sort of a lot of the work that we're doing with Nouveen which is that TIA investor and third largest holder of muni bonds so basically they said you know why should companies even disclose why should governments or cities counties municipalities disclose their ESG risk we're just going to rate externally we're living in the in the era of big data we're going to gather all data we can find about a city about a county about a state and all the bonds that they issue to all this stuff we're just going to rate it we're going to rate it using ESG models and now we want to find out to guess whether you know the underlying should I say the underlying ESG metrics intentional or not of any municipality actually start making a difference in in in the bond market so we're rating all these models we've been looking at models across water and hospitals and electric and city and schools and higher education and now we're looking at them in transportation everything else we we look at sort of different ways and how we could start looking at all these municipal bonds and I said their third largest holder of muni bonds the current market of muni bonds is about 3.8 trillion dollars outstanding right so essentially screen all these 40 000 issues for this particular this particular owner right and look at sort of how different bonds spread out now what what nuvin will do with that once they have that information they will bundle the top quintile and the bottom quintile and they sell it to you and me for those of you that are taa right so you can actually go into your pension fund and select you know your bond fund and you will get a different kind of performance but now think about it that's some of the underlying metrics that are part of your sustainable bond fund may actually have been generated by the University of Michigan which is I think pretty pretty cool so we're not there yet we don't know yet to guess how a high ESG a low ESG rated bond municipal bond fund is going to perform we don't yet know what the market signal is going to be however there is some hope and the hope is this municipalities as I mentioned earlier also issue green bonds a fraction right just like corporates issue green bonds but it's only 2 percent of the 80 trillion dollars in in the bond market the corporate bond market municipalities also issue green green bonds but it's a very small fraction of the total municipal bond market so when you look at the green municipal bond market since about 2016 and this is not our work this is work it was just published last year we're starting to see a premium there as well of a basis point so if there's anything that municipalities want more than anything else particularly post-covid is let's source our capital for our infrastructure for all the stuff we want to build as cheaply as possible right and so the less you have to pay for your bond the better right over time and so what we're starting to see is that the yield spread and this is secondary that's once once a green municipal bond start trading that we're starting to see a spread between between a vanilla bond and a green bond a green municipal bond so the green municipal bond becomes a more trusted more in demand less risky bond over time just like the corporate bonds corporate green bonds or corporate bonds that are disclosed by that are issued by ESG disclosing corporates also become more attractive so just a couple of take-home messages here because there's sort of a lot of data I went through but the the basic point was does disclosing your risk or does even managing your risk or does understanding your ESG and climate risk actually matter in the capital markets are the markets starting to respond is there a market signal as well as the the the the typical policy signals so the policy signals that most of us many of us look at is there a capital market signal and the way so the sustainability scrutiny as I argued is going to be a necessary condition for disclosure and materiality pricing right and immateriality pricing ultimately will really help scaling all the sustainability work that is I mean to be honest still fairly fringe it's sort of it's not it's a fraction of the market is this if we can make sustainability material and we have a material signal can we can sustainability become a mainstream financial signal that essentially will drive the way how we invest in infrastructure in corporate infrastructure or in municipal infrastructure so ESG disclosures are becoming increasingly material in terms of cost of capital so both debt and equity in terms of bond yield spread tcdf disclosures which are very closely related to ESG factors and metrics they have to be financially material right because otherwise the market won't respond I mean that was the premise of TC TCFD I don't know why I will see TCDF I must be dyslexic so it is TCFD scalability will be improved when actual price signals emerge and become stable or can be benchmarked across sectors and geographies right and that's something that everybody has been looking at there's actually even still papers out there that right now say we're all hoodwinked by ESG because ESG right now is a lot driven by metrics in the physical world that are not well translated in the financial world and if you can translate in the financial world it's very hard to know how to respond to them a corporate engagement in disclosing ESG risk under TCFD guidance is likely to become more facilitated when these financially material risks can be measured and verified and this is actually something that we are doing with the Japanese a Japanese company that is working with practically all holdings of the Nikkei 225 is to actually start giving them a financially material metric to disclose their water risk for their TCFD disclosures such that their share price can sort of improve or capture a premium this is the last thing I wanted to say it's a lot of information and as I said it's really sort of taking the the capital markets angle instead of the policy angle to sort of figure out where we meet in the middle thank you awesome thank you before we let's go ahead and just jump into questions and so we'll go Caitlyn and then Daniel Caitlyn do you want to unmute yourself and then just ask yeah that'd be great thank you so much and thank you for joining us professor Adriens absolutely my question is in regards to the different elements of ESG investing right they're an inclination for the more I guess tangible elements of ESG ratings to be moving towards carbon measurements I feel like that is probably the most quantitative measurement but I guess going along with that how will more qualitative factors such as social implications be brought into these ratings or do you think that they need to be ratings in and of themselves separately that's a very good question so it's sort of I mean your question in part is an aggregate metric right the whole question of aggregate versus versus sort of more specific metric all the indicators in the market right now are that people are probably going to be moving away as far as this materiality is concerned from ESG the value is going to be in the pillars and the factors so ESG becomes part of factor investing but an aggregate ESG value in the financial markets is probably slowly going to sort of become more granular to figure out what can you actually measure having an impact on future growth and what are more intangible factors that are going to be part of sediment factors right so the sort of sediment factors and the real operational kind of risk factors and I think that's the direction things are going in fact when I talk to MSCI and to many of the other providers in the industry just recently had a call with Refinitiv and with NASDAQ they now get calls from specific pension funds from wherever they are is to actually develop a very specific index specifically on one metric out of the entire ESG universe to try to figure out I guess how to improve just on that so I hope that that answers your question if not directly in a roundabout way absolutely thank you so much really interesting um Daniel and then Allegra thank you thank you professor for presentation hey Daniel I guess the question that came to mind as we're presenting is how much do the ESG ratings correlates with firm performance right historical performance right to sort of try and tease out of the causality versus correlation right because maybe investors just look at other metrics that also correlate with ESG there's a paper that just came out out of the financial literature and the title is aptly the app title is aggregate confusion in that it does not well so the sort of two things one ESG ratings are a very poor characteristic of ESG risk because there's so many different ways and poor benchmarks on which they are being measured there was some degree of agreement in some sectors and there was a lot of disagreement in other sectors so and a lot of it has to do with I mean this actually your question reminds me of when I started going with this whole water bed and Aquarius to the capital markets and I went to minute for about a year or so I went between London and Frankfurt and Singapore and New York and whatnot and a couple of times I made it on to the trading floor and I started talking to some of the folks that were you know actually doing the real-time analysis and I said okay how do you incorporate water risk you said we don't how do you incorporate ESG risk you said well we don't really there's so much else to keep track of so then the question was a bit how would you incorporate it so well I mean if you have something within what you're measuring that is sort of a regular risk for a certain type of company or for a certain type of sector we can actually incorporate it and know what to do with it I guess in our in our risk assessment and I said wait a minute I mean so if you have two companies that are exactly the same say two mining companies to semiconductor companies whatever it is and one is a higher water risk user or a high carbon emitter and the other one is a low water risk user and the low carbon emitter the low one is a better one right and he said well to you it is but these these numbers in terms of carbon and the numbers in terms of water as in tons of carbon or square or cubic kilometers of water are no financial risk metrics I have no idea what these companies even the high water risk in the high carbon risk company is actually doing to mitigate its risk such that it affects its price performance its credit risk it's everything else right so it's the the the devil is in the translation between the ESG risk and the financial risk and that's why I said look we need to have more research that goes on in that starts looking from the capital through the capital markets lens right to tease things out now that said there are many different groups including a Harvard and elsewhere that are building all sorts of statistical models as well as machine learning models to try to tease out which factors make sense there was a recent study was done by Deutsche Bank and I know it's not the best example because it is in the news for various bad reasons but they did one on ESG and sort of corporate performance and the only factor that statistically stood out was retention programs of companies and that was not in 2020 by the way this was before COVID retention programs and pension programs of companies those were the two ESG factors out of everything else that really explained the difference I guess of high ESG a low ESG so so this you know it's a very tough place to be and so that's why we start looking for these market signals and that's also back to the earlier question that was asked why aggregate ESG is going to be a continue to be a very tough sell and people are going to start going more towards discrete and more granular factors within ESG and looking at either sentiment side things or operational side. Allegra and then I have one more question to ask and we'll wrap up go ahead. Great thank you so much professor for this non-boring talk about green bonds I've been to a lot of talks about green bonds and this one was not boring and so congratulations that was great. My question is about disclosure and reporting standards you know and different stock markets what what you see is the value or leverage of having different stock markets create their own mandatory reporting frameworks I'm thinking here of the Johannesburg stock exchange with their mandatory integrated reporting from assist now almost a decade ago to something like the NASDAQ that doesn't have any of these so do you think requiring ESG very granular ESG reporting at the level of stock markets makes sense as a point of leverage or is it really at the national you know like the SEC and you know the Hong Kong reporting commission level that would make the most difference in your mind thanks. That is and well first first of thanks for your comment regarding the green bonds I think this whole yield spread is a very a very cool thing and relating it to ESG disclosure your other question is very dear to my heart because it does it did become a very recent problem even in our own analysis that yes it will to a large degree become also stock market specific so not only is there not a benchmark on ESG there's also not a benchmark on what different markets actually require right I mean I used to spend a lot of time in Finland the Finns do it again very different the Nordics in general right to do it again very different and so Johannesburg and whatnot so we just mainly looked at because of our recent work between the US and for example look at NASDAQ versus or S&P versus say say the Nikkei 225 and basically there is almost no comparison you cannot say look at all these are all the equities and this is how we're going to be treating them and this is a disclosure no matter where they are traded or whatever the primary trading trading market is it will not work and we know by now that that will not work because of the different requirements I guess that already are in existence in these different platforms and so therefore things that you're calling out as an opportunity for example for the S&P already were incorporated as a disclosure it was a risk that's really taken into account for example in the Nikkei market right there's already taken into account in Johannesburg and so those are going to be very interesting things to tease out to actually now starting to look at these correlations between stock markets which sorry Daniel but that makes even the ESG more confusing because now now you have to start worrying about where you're trading oh and with that we're at time and so I am sorry the last question just doesn't get asked oh so painful so I'm painful um I hear you whoops sorry um I have a fast mute because I have a little kid so thanks for joining us today if you missed any of our previous talks then you can view those on our website and if you didn't get a chance to ask professor Adrian's a question I'm putting his email address right now in the chat and you are welcome to email him directly absolutely I'm happy to happy to respond and engage can we all just have a moment to to acknowledge professor Adrian's thank you thanks again hopefully next time live yes we can all hope so please come back next month where our topic will again center on fintech and financial inclusion with professor terry freedline from the school of social work thanks everybody awesome thank you thanks christy