Ensuring the Green Standard

Curtis Ravenel is the Global Head of Sustainable Business and Finance at Bloomberg. Curtis served on the board of Sustainability Accounting Standards Board (SASB) and is a member of the Secretariat for the FSB Task Force on Climate-related Financial Disclosure (TCFD). He is a galvanizing force in bringing together groups to harmonize environmental reporting standards and looking at climate from a financial lens.

In your role as Bloomberg’s Global Head of Sustainable Business and Finance, what are you most excited about?

We started our team within Bloomberg in 2006, back when we used to be called the “Sustainability group”. Several years ago we changed our name to the “Sustainable Business and Finance group” because Bloomberg really sees sustainability as both business and finance issues. The most important thing we have been able to achieve at Bloomberg is the work on our products and services, simply because of our influence and reach through distribution within the financial and business community. When we build products and services that integrate sustainability into all of the data, news and analytics tools that we have at our disposal, we are able to exert our influence.

I was banging on the sustainability door for over a decade, and the door has finally collapsed on top of me.

We have this running joke that “I was banging on the sustainability door for over a decade, and the door has finally collapsed on top of me”, meaning that demand has really accelerated over the last several years. We were ahead of the curve early on. Originally, we said “build it and they will come”. Now we’re just trying to manage all the requests for collaboration that we receive from both internal and external stakeholders.

What are the main reasons for the sustainability acceleration?

I see three primary reasons. First, there now is a growing body of evidence that ties performance around broader ESG issues to financial performance and alpha. There are plenty of risk management signals within ESG data – think of the BP oil spill. The second reason being regulatory interest. A number of jurisdictions around the world have signaled quite strongly that this is on their radar screen as a priority, not only from a company disclosure point of view, but from an asset management and financial institutions point of view. And then third, there is a generational shift with millennials. Morgan Stanley states that 84% of millennials are very interested in investing their money in alignment with their core beliefs. This means that we will see a significant transfer of wealth, as much as $43tn, moving to the millennial generation. Sustainability is a demand-driven trend and these are real drivers.

Looking back to 2006 when you presented your sustainability proposal to the Bloomberg leadership team, did you think it would take this long to get to where we are today?

Every time we talked about ESG we used to say, “in 5 years it will be a big deal”. In the end, it took a lot longer than that, longer than I would have hoped. ESG suffers from the “on the one hand and on the other hand” syndrome; if the investors had the information that they need, it would be a different story. The availability of data, and history of data, is why ESG is finally taking off. I remember when we launched our ESG product in 2009. Back then there was concern that we didn’t have enough history. Investors love history, especially the quants who want 10 years’ worth of data to make any decision. I remember thinking at the time that the best we could do was to get 3 or 4 years’ worth of data, and I jokingly looked at my watch and said “well, we’re just going to have to wait”. Now we have 10+ years of historical data on a lot of companies. You add that interest, plus the academic research, the rise of machine learning, A.I., big data, natural language processing, and you have got this perfect storm of better information, more history and better tools to analyze the information. I also think the rise of intangible value is very important. With tech stocks pushing ahead in valuation, there has been a flip flop from book value to market value. Everyone is looking for more information, insight into how a company is managed or their longer-term plans. Frankly, financial information is now commoditized. While ESG doesn’t entirely solve this issue of intangibles, it certainly does provide insight into how well a firm is managed overall. I think ESG still has a long way to go in the sense that we still need to develop more forward-looking indicators. But I do think ESG helps as a good indicator with how the company will weather through broader forward-looking issues. Finally, climate has become “the big ‘C’ in ESG”. Between policy related issues around the Paris Agreement, and increased weather events, both extreme and chronic (e.g. water shortages) – there is a whole plethora of inspiring forces that have elevated ESG, and more broadly what I call sustainable finance, to the forefront. I do like to remind people that ESG is technically just a data set: environmental, social and governance data. We look at the overarching spectrum of activity around the space, with green bonds, clean energy investment, impact investing, socially responsible investing, ESG integration, and negative screening, under the rubric of what we call “Sustainable Finance”.

Now we have 10+ years of historical data on a lot of companies. You add that interest, plus the academic research, the rise of machine learning, AI, big data, natural language processing, and you have got this perfect storm of better information, more history and better tools to analyze the information.

Coming back to your point about data, where do you see the biggest challenge – is the issue that investors aren’t using the data or that companies are not providing the right data?

It’s all of the above. I think historically, as we know, the evolution of ESG data really came more from the SRI (socially responsible investing) community, as they were interested in the company’s impact on society and the environment. So the datasets that evolved around disclosure – the Global Reporting Initiative (GRI), CDP (formerly the Carbon Disclosure Project), etc. – were primarily focused on that outward view: how does a company impact the environment or society? That is not necessarily the same data set that investors interested in financial performance would need. At Bloomberg, we support and also report against the CDP and GRI frameworks. Their information is extremely important, but can also be confusing to the mainstream investor. Through Mike Bloomberg’s leadership on climate, we have gotten behind the Sustainable Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures (TCFD), because those groups are bringing a financial materiality lens to ESG issues. After years of research and heavy lifting, they have identified key sustainability issues that show potential for financial impact at an industry level. Financial materiality allows for the opportunity to introduce the entire financial market to these issues – it helps them form a better view on the future financial and operational performance of a company. That’s why we, as a service provider to the broader financial community, believe that focusing on financially material ESG issues, and climate-specific issues through the TCFD, brings a benefit to the overall financial markets. The problem is that we have not priced externalities. If those were properly priced, we wouldn’t have to worry about any of this. If we had an efficient market, markets would allocate capital efficiently. Inefficiency has somewhat resulted in some harm to our planet and to society overall. So ESG analysis serves multiple purposes – it is good for our business, for society and the market – it’s a win-win-win.

What role should the rating agencies play in the sustainable investment evolution?

They are a hugely important part of the ecosystem. I think the primary issue is that we are only as strong as our weakest link and the financial ecosystem has a lot going on. Rating agencies suffer from what Bank of England Governor Mark Carney calls “the tragedy of the horizon” in the sense that they assess companies’ ability to repay debt over a short period of time, and some of these ESG issues are much longer term. Not to mention the fact that they, like the rest of us, haven’t had sufficient information available to do the analysis. This is one of those “on the one hand, on the other hand” cases I mentioned earlier. On the one hand, they should be doing more to integrate ESG into their analysis. On the other hand, they have begun to do that. There has also been a series of acquisitions among the rating agencies to help them bolster their capabilities in the space. Moody’s recently acquired Vigeo Eiris, a green bond and ESG rating agency, and S&P acquired Trucost. The evolution is happening, but they have a ways to go, just like all of us.

What about the equity research analysts, what’s their role?

Equity research has gotten better too. The problem with sell side research is that it is sell side research. If you look at all of the major bulge bracket financial institutions’ sell side research, it’s pretty good. But, it has not gotten the traction it could because it is on the sell side and not as frequently integrated into their traditional sectoral analysis. At some point ESG analysis needs to become “business as usual”. We want every sector analyst to include ESG considerations in what they do. Until it becomes part of mainstream analysis, you will still have adoption issues.

What about the corporations? You could argue that to make sustainability “business as usual”, it should fall under the CFO office – what are your views on that?

I agree 100 percent. One of the successful outcomes of the TCFD, and of SASB for that matter, has been the focus on financial materiality. Once you focus on financial materiality, you are talking about the strategy of the firm, its risk management functions and financial analysis, which is the CFO’s or the CIO’s office. Once it becomes a strategic part of the organization, you get cross-functional activity within the organization. On the flip side, you really have to have financial analysis integrated into sustainability considerations as well.

What can you share about the Corporate Reporting Dialogue’s (CRD) Better Reporting Alignment project and its progress to date?

I wrote an article for the Journal of Applied Corporate Finance in 2015 about the need to improve the signal-to-noise ratio and rationalize the issues within the corporate reporting landscape. I think in the beginning of anything, it’s really important to have innovative, succinct, and arguably differing evolution. But at some point, in order to reach escape velocity and mainstream adoption, you need rationalization and clarification – a more standardized framework needs to emerge. And for corporate reporting we have reached this point for standardization now. I think it is also important to note that most of the reporting frameworks were created as “frameworks” (GRI, CDP, etc.), and now we have the emergence of standards. With both GRI and SASB creating a standards board, there is an even bigger need to rationalize the frameworks. The Better Alignment project is really an effort to try and rationalize this. And that rationalization is really three steps – (1) where are the metrics the same? (2) where are the issues similar but the metrics different, and how do we try to bring them into better alignment? and (3) where are they different and why? The first CRD report, which is due in September, will be focused on climate. We started with climate because we believe it’s the most pressing ESG issue of our time. Given our work on the TCFD, climate in particular has gained traction as a topic.

Who is your sustainable hero and why?

Michael Bloomberg! The great benefit that I have of working at Bloomberg is that we are a private company, and Mike is a man of conviction. He has the climate and sustainability credentials, the entrepreneurial and business credentials, as well as the financial, government and policy credentials. He has been an entrepreneur, he has been the mayor of the largest city in the U.S., he launched the PlaNYC Sustainability 2030 Plan, he sponsored my efforts to introduce ESG into our products over 10 years ago, and he bought BloombergNEF, our research arm focused on anything related to the energy economy. In addition to this, his philanthropic work through Bloomberg Philanthropies is hugely influential for trying to decarbonize the economy. It started with a campaign that was called Beyond Coal. Now it has gone further than that and is called BeyondCarbon. Mike announced that he would not seek the Democratic nomination for President and would instead double down on his climate efforts. So, between Bloomberg Philanthropies, Bloomberg LP, and Mike Bloomberg, I have a support framework that is unparalleled. If you believe – like I do – that good policy is necessary to activate sustainability, but that you also need private capital to help usher in this transition to a lower-carbon economy, then there probably is not a better place to influence that than working at a financial information giant like Bloomberg. He is definitely my hero.