Managing risks: a financial perspective of the ESG landscape

About this ATalk

Alicia Rubí, Sustainability Strategy Partner at Attalea Partners, is our guest speaker in this episode of ATalk. Alicia has dedicated her financial career to manage the risk-return trade off and currently provides Boards and institutional investors with strategic sustainability expertise.

“Sustainability is a way to future-proof a business” is one of the key insights that Alicia Rubí shares in this ATalk episode. During our conversation, she expands on this information by shedding light on market transparency, investment decisions, ISSB, sustainability standards, green bonds and new developments in financial markets.


Andrés Cardona, Chief Growth Officer at APlanet, interviewed Alicia Rubí for this ATalk. You can find the full transcript of their conversation below.

Andrés CardonaWelcome to ATalks, where sustainability has a voice.

Today we have Alicia Rubí. Alicia is a partner at Attalea Partners, an ESG strategic and financial consultancy in Madrid. She holds the Fundamentals of sustainability accounting credentials, acts as a subject matter expert for the Value Reporting Foundation, and is a colleague at the FSA Club for Western Europe. Attalea Partners is Spain’s foremost independent strategic and financial ESG consultancy in private markets. Alicia advises clients on ESG informed business strategy, especially regarding the financial materiality of sustainability factors.

Alicia has also supported Global Stakeholder Engagement for the Impact Weighted Account initiative developed at Harvard Business School. Impact weighted accounting transparently monetizes a corporation’s ESG impacts into financial accounts. Alicia has worked in New York, Madrid and Sao Paulo. She began her career at Citi Bank, where she worked for 15 years. She has managed the investments of two large family offices in Spain and was a member of the investment committee of one of Brazil’s largest corporate pension funds. She is a member of the Executive Committee of Level 20 in Spain upon European Association, dedicated to career success for women in the private equity industry, and has served on the boards of both CFA Society Brazil and CFA Society Spain.

Welcome, Alicia. We’re thrilled to have you here.
You were with us in the APlanet Summit, and we were delighted with your presentation. So I thought, since we’re discussing ESG and finance, you will be the perfect person to come here with us. So tell us a bit about yourself.
Thank you, Andrés.
As you introduced me, I was born in the United States, but I’m the daughter of a Spaniard, so Alicia Rubí with a Texas accent. I’ve been living in Madrid for over 30 years. So after starting my career at Citi Bank in New York, because I am a dual national, I had the opportunity to come with the bank to Madrid and I met my husband and stayed. So I’ve been working in Spain, as I said, for 30 years.
I started my career in banking. Banks lend money, we get paid to take risk. So that I learned in my first job, that risk management is a way to make money, but also the way to avoid losing money. So all of my financial career has been managing the risk-return trade off. And three years ago, I had taken a few years off to raise my family. And when I was thinking about what I would like to do when I returned to my career, I focused on sustainability and the emerging knowledge – a body of knowledge – that helps investors manage sustainability risk.
So a professional investor cannot manage risk without indicators. Right? Ratios, financial ratios… And in the world of sustainability, we call those key performance indicators of how a company is performing on various sustainability factors. And those factors can be either an opportunity to succeed for a business or it can be a risk that needs to be managed to avoid all the different risks that it can lead you into.
AndrésYes. It’s super interesting. In the past ATalk, I was discussing that sustainability is no longer like a satellite, something quite esoteric. To say something that people look and they oversee and they think about it more like this is to show other people that I am sustainable. Now sustainability has merged into the whole corporate body and it’s taking a key position into executive committees.
AliciaSustainability is one form of operating performance. Every company has a business and every business has certain sustainability factors. And what industry your company operates in, the sustainability factors that can drive revenues or be a variable in expenses or reduce or increase the risk profile of the company, these are going to vary depending on the industry that you work in. But sustainability factors are operational.
AndrésI love what you said. Sustainability is a way of operating. It’s quite powerful because I think companies should understand that sustainability and financial performance and revenue, they’re not in a fight.
AliciaThey are directly related.
AndrésYes. And there is a lot of times when companies, especially medium and small businesses, they see sustainability as an expense and they don’t see it as an investment.
AliciaIt’s interesting. I had a conversation yesterday with a company let’s see a conversation with a company that wants to borrow money and a group of lenders okay. And trying to decide how to structure a sustainability linked loan for this company. Right?

So this company is in the advertising industry. What sustainability factors could it have? The quick answer is the obvious ones are its staff. So the S in ESG. In the advertising industry, you need to have a diverse staff that will allow you to communicate messages in creative ways that can engage a diverse audience, the widest possible audience. So that’s one example.

Another example is how it transmits its product. So if it’s using a lot of data centers to create and transmit digital images, etc. Well, then data centers have huge sustainability footprints. So we call that the environmental footprint of the hardware that you use. Then there’s governance issues, ethics in advertising… But the conversation quickly took a turn towards sustainability advertising. And we started talking about greenwashing, which is an ethics issue. But the flip side of that is helping companies. This is an advertising agency. It’s helping companies communicate – we were talking about this before we went live – transparently. The good that they are doing. So for an advertising agency to start a line of business that is communicating sustainability stories in an ethical way, avoiding greenwashing, this is a new line of business and the banks loved it. So we’ll see what happens.
AndrésIt’s also a realy creative way to see sustainability. And I obviously agree with the concept that marketing and advertising companies should care a lot about how they’re communicating. I’m always thinking about how you manage your information. So they should be able to confirm that the information that they are communicating is actually true. Because especially, for us, when we try to communicate what we do at Planet, we see, OK, but this is backed by information, by data. And when it isn’t, we just say, okay, we can’t communicate this because this is something that can’t stand an analysis.

Okay, so we’re going slowly into the subject of this conversation and I wanted to ask you, and I want you to tell our audience how sustainability is merging into finance and why should we care?
I mean, you already talked a bit about this, but I think the story in the background is super interesting.
AliciaSo I mentioned that I am a finance professional and I remain a finance professional. I work in a niche area that is exploding, which is sustainability finance. And why is it exploding? It’s exploding because investors who are providers of capital know that sustainability will help them. Understanding the sustainability factors of the borrower or the company that they invest in will help them to manage risks. Right? So it’s transparency. Just because you don’t talk about something doesn’t mean it’s not there.

So this discussion of sustainability is putting a name to something that’s always been there, just nobody was paying attention to it. So now as our sophistication as investors grows, we are able to identify, measure, monitor and manage these factors. Sustainability and finance are together because sustainability is a risk factor that needs to be managed. So it needs to be understood, quantified and managed. Hedged to the extent that it’s possible or simply managed. Just because you don’t know something exists doesn’t mean it’s not there.
AndrésAbsolutely. I agree 100% with this. And one of the things that we say all the time in a planet is that – like with the 1929 crack of the stock market, one of the things that caused that was that there were so many different ways of approaching finances and there was no norm and companies were doing it their own way. Actually, investors couldn’t assess if a company was actually performing good or not. So with that, with the lack of information, with the lack of data and standards for measuring your finance performance. At the end of the day, the economy went downwards.

And I think right now we’re seeing something quite similar with sustainability because there are a lot of ESG risks associated to the company performance. And that’s why they really need to incorporate not only the finance criteria that they’ve been doing for over a century, but now they need to do it in a more professional way with sustainability.
AliciaSecurities law – the laws that protect investors – when an investor, whether it’s a corporation or an individual, buys on a stock exchange or a publicly traded market, a bond or equity or stock right, you are protected by the securities laws of that country.

One very important law is insider trading. Right. So what is insider trading? Insider trading is when some people know some information, but other people don’t. And that’s considered to be unfair. No one questions that. Sustainability information can move the price of a bond or a share. And an investor has a right to know this information because it can affect the price of the bond, or the price of the equity. So any information that an investor might use to make an investment decision. And what is an investment decision? Buy, sell, or hold. Okay? I decide to hold something or I decide not to.

So any piece of material information that could affect the price of a stock or bond must be disclosed under law. That’s the way the law has always been. But no one until the recent years started talking about sustainability factors falling within this larger concept of insider trading and transparency in markets.

The Sustainability Accounting Standards Board, SASB, was founded about twelve years ago to help companies know what information they needed to disclose because there isn’t a law about it. They were at risk of violating securities laws if they weren’t making this information available to all investors at the same time in a way that was easy for an investor to find and understand and evaluate. So SASB was born to set standards for sustainability disclosures in the United States. In Europe, the GRI standards came from a different angle but have the same objective.
AndrésWith that approach (GRI, SASB, etc.) what do you think should happen? I know that in accounting you have different accounting methods depending on the countries. But when you have these different standards and companies and investors can’t compare two different companies because they are reporting to two different standards, what do you think should happen? Or what do you think is going to happen? Because it is not like GRI or SASB are kings. There are a lot of companies who just report with their own methodology. I see this as a huge risk. But what are companies doing?
AliciaSo in November at the COP in Glasgow, the creation of the International Sustainability Standards Board was announced and then it would bring under its wing SASB and TCFD which is a task force for carbon reporting for financials financial disclosures. The objective of the ISSB is to establish a global baseline for sustainability disclosures precisely for the reasons that you just said. In some countries there’s one set of standards that might even be legally obligatory in other countries there are no standards at all and so you have a sort of a wide range of reporting styles which is not easy for an investor to understand.

The point of the formation of ISSB is to establish a global baseline, minimum disclosures, that all jurisdictions it can agree on. And from there it may be that certain jurisdictions have some concerns that need to be built upon that. But the attempt right now is to establish a minimum baseline globally. And there is broad consensus for that. Part of the way markets work is what’s called market consensus and investors demand transparency or consensus practice and when they don’t find that, they just don’t invest.

So issuers need to meet the expectations of their investors whether it’s by law or just because all the investors expect it to be done that way. That becomes soft law. Either you meet the demands of your investors or they don’t buy your paper.
AndrésThis is something that is not only in the best interest of investors, it’s also in the best interest of companies. Because as far as I can, see we’ve discussed global markets and stock exchange so we’ve been talking about huge companies. But for the SMEs it’s also important because right now in the midst of the inflationary scenario we have now, with money getting more expensive by the day, getting access to sustainable loans that help you get cheaper money has to be in the front page of every CEO right now. You need to lower your WACC. So it’s super important for you to invest in sustainability to get even cheaper money.
AliciaAbsolutely. This is a trend that is front of mind to, I think, all corporations that need to access capital from third parties. So here in Europe where we have a regulatory framework that is robust and quite clear about what is a sustainable objective, what does Europe consider sustainability? Well, it’s actually written in laws right? And there is an incentive for money to go towards these European sustainability objectives.

Europe has worked and is working on a framework for sustainable finance. And part of it is first defining what is sustainable and the second is giving incentives to the lenders or providers of capital to assume those risks. So you’re lending capital for these sustainable objectives but still the company needs to repay you. Or they need to be profitable in this economic activity that is defined as sustainable. So it’s clear what is a sustainable objective. It’s clear the markets have set soft law because it’s not a law but it’s the market consensus on what is a sustainable bond. A sustainable bond, the green bond principles exist and the financials market participants all abide by them, are aligned with that. So that means an investor is not going to buy a bond that calls itself a green bond if it’s not actually aligned with the principles. And the same with the sustainability linked loan principles. A bank lends money to a company, it might be syndicated among a group of banks but it’s more of a bilateral private agreement. In the public bond markets it’s very important that the bonds be structured like a commodity. Bonds are freely tradable because they are easy to understand.

So there the key in both these loans and bonds is key performance indicators on sustainability performance. Without the key performance indicators that standardized key performance indicators, there’s no way for an investor to value the relative risk reward from a sustainability standpoint or compare one bond to another. And that is an investor necessity. And because investors need that they will quickly start to see bonds trading on KPIs just like they trade on financial ratios. You will begin to see that and it will be ratios, probably the key ones will be emissions ratios, emissions intensity. But I don’t think that we are very far from seeing climate bonds.
AndrésRight now in the UK, for example, a lot of the companies we’re having conversations with are interested in everything that has to do with emissions and controlling them. So these companies eventually will get into the public markets, they will meet bonds and those will be traded. And regarding emission KPIs, this is opening a whole new scene not only for finance but also for sustainability professionals. And this is something I was hearing two or three weeks ago, people talking about the new 2.0 ESG professional. A couple of years ago they were more guided towards social and environmental impact. But now it’s getting even more professional. And people who know about sustainability, they also should know about finance because they’re merging. This is a hypothesis that I have and I think sustainability eventually is going to merge into finance in the future. This is something that I see. Maybe it’s also because I have a financial background that I think everything goes towards that but I see it. What do you think about it?
AliciaSustainability risk is credit risk, period, end of story. The sustainability factors I said at the beginning. Banks lend money, take risk to make money. You lend you money, there’s a risk that they can’t pay you back, right?
And what depends on whether a company can pay you back? It’s cash flow generation, period, end of story. So anything that’s going to help a company to grow its revenues, to reduce its expenses, to reduce its risks, is relevant to a financial investor, to a credit professional, to someone who is investing in the shares of the company. It’s inseparable.

What’s the difference is that it’s only now becoming identified and slowly working its way into the mainstream. It’s been on the fringe. It’s been on the fringe for a long, long time. Now, there’s actually sustainability standards! Those didn’t exist before. There’s sustainability standards and companies are starting to understand it, starting to look for the data, to be able to report it. In some countries, it’s obligatory to report that information. In other countries, it’s not. So that means that we’re at the beginning. This data is not universal. It’s not universal, it’s emerging data.

So emerging data means that investors, some investors are very sophisticated and highly sensitive and this is very important to them. Others are trying to understand it. In ten years, we will be be having this conversation. In ten years, this will be part of a credit analysis or a financial analysis, a corporate evaluation. It will just be another factor that’s included. And they’ll teach you in business school. And ther won’t be talks about it, it will be evident.
AndrésAnd this opens a challenge for companies to collect their information and to actually be able to audit this information. Because one of the things we were discussing before we went live was that there are a lot of companies, even big companies, that are collecting all of this information through spreadsheet, and there’s no way to edit this information. So this is one of the things that are the key challenges that companies have right now, is to start professionalizing not only the sustainability expert profile, but also the processes that they have for collecting all of this information. What do you see that your clients are doing regarding this? Are they still in another stage or are they more mature?
AliciaWell, we have a little bit of everything. So our clients tend to be smaller companies, the smaller companies also, because the volume of data that they need to manage is they consider to be manageable. They find it more manageable to do it on an Excel sheet when there’s a small company than to go out and hire an external provider and have to do all the onboarding for that. Depending on the scale of the company, it’s reasonable. Now, there are other companies that might have subsidiaries all over the world or lots of offices even in one country right. Every single office has data that needs to be aggregated for corporate reporting. So just like there is financial auditable trail and any auditor is going to expect that and demand it before they sign up on it. That is beginning to be the case with sustainability related information.

And I believe that it will be the auditor or the obligatory legal obligation for sustainability disclosures to be verified by a third party that will force a migration onto digitalized platforms. Go paperless going paperless is a guarantee. It reduces errors and it increases the data trail. So everyone, the company itself, as well as the user of that data, a third party user of that data, can be a tranquil that the information that they’re using is reliable.
AndrésThis is super important, being able to trace every step of your data so that it is possible to agree on the numbers and double check what has happened in the past.
AliciaThere’s always going to be errors. Corporations restate their earnings. Okay? Big corporations sometimes restate their earnings. There are international accounting standards boards that all the time are adjusting calculation methodologies. And sometimes by changing, adjusting how certain concepts are calculated, companies will have to go back and restate their earnings because the counting standard changed. So in accounting, nobody thinks twice about this. It’s a pain in the butt, nobody likes it, it’s a headache. But investors accept that, accept the reality that even financial numbers sometimes change. They change because the standard that says how you measure change, the standard itself has changed, not the company’s numbers. Unless the company made a mistake, which sometimes companies do.

But when that happens, the companies go forward and say, we’ve readjusted our prior year’s earnings to take into account of X. And depending how grave the error was, may not even change the stock prices. It’s something that’s commonplace. So that is little by little, as sustainability data becomes normalized, accepted, reliable, because it’s verified that everyone’s using the same standard and calculates things the same way, it will become a non event.
AndrésWhat I was thinking the other day is, at the end of the day, with sustainability merging into finance and becoming a part of corporate performance, being sustainable and excelling at your sustainability performance is going to be integrated into financial performance. I mean, last year APlanet had a conversation with Alex Edman, a professor in the UK, and his thesis was Sustainability means Profit. He said, if a company is sustainable and can incorporate all these criteria into their operations, at the end of the day, there’s a higher chance that they are going to be more profitable than if they are not. What do you think about this?
AliciaAbsolutely, I 100% believe that. I think that once again, sustainability offers opportunities, new lines of business. The public every day are more conscious as buyers of services and products that we consider to be friendly or not damaging to people or the planet. So there is a huge shift in consumer behavior towards products and services that we consider to be sustainable. So that’s a line of business that you can either position yourself to capture or lose.

If your product is not considered to be sustainable and you either don’t communicate or you don’t change, you will lose your clients. So your revenues will shrink or they can grow, and you can decide that. That’s business strategy 101, we’re not talking anything different here. To the extent that you’re able to reduce your expenses by sustainably managing your supply chain.

Now some people might say, oh, by sustainably managing my supply chain, my expenses are going to go up, because products that are sustainable cost more. Well, yes and no. Because what your overall cost is stability in your supply chain, making “sustainable products” stable. To the extent that you can rely on renewable sources of energy, you are lessening your exposure to supply shocks. And a supply shock puts business continuity at risk. If your business can’t operate, then your clients are going to look for someone else that is operating. Or maybe when you come back online they decide to find another provider.

So reputation, risk, brand management… You’re managing your corporate reputation by managing your ability to preserve business continuity. Your resilience as a business in many ways depends on streams of revenues and input costs. If you’re able to eliminate volatility there or reduce the volatility. And volatility is not only price, it’s availability. So sustainability is a way to future proof a business.

This is another key concept that you just said here that I found powerful and it’s through sustainability you can reduce volatility. This is a great way to understand from a business perspective how you can grow your business. Because if you have like a lower delta, it’s a lot easier for you even to project and to try to understand where you’re going to be one, two, three or four years from now if you manage to have less volatility in you.
AliciaWhen you reduce volatility in your business, you lower your WACC. Right. Because the risk, your risk profile has fallen.

Yeah, it’s amazing. There’s a lot of concepts here that I have never thought of and I think they’re quite great. Well, we’ve discussed sustainability-linked bonds, financing opportunities, but I think there’s a lot of people who might not know exactly what they are. So what are sustainability-linked bonds? How do companies structure that, financial institutions and how a small or medium business can benefit from that? What is the process and how can a company can lower their WACC.
AliciaSo the sustainability linked bond market and the sustainability linked loan market, while they’re similar, they’re separate. In the bond market, the focus is on use of proceeds. So when a company goes to the bond market to borrow money from investors, for a green bond, it would have to offer to investors: a bond is contract, I’ll borrow your money and I’ll pay you back on a certain date and in the meantime, I’m going to pay you a certain rate of interest and also I’m going to tell you what I’m going to do with your money.

So in a green bond, there is a green framework that actually governs the use of proceeds. So I issue 100 million euro bond, I receive €100 million. What am I going to do with it? In the bond contract, there is a framework that ensures that the investor, it’s a guarantee to the investor that the money is going to be used, as I promised it would.

Again, here we are in Europe, a green bond, it should be used for sustainability objectives as listed under the taxonomy, which are quite wide range of possibilities, but let’s pick one, right? It could be capex, necessary to reduce my carbon emissions by updating all the engines that I use in my factory so that they’re more efficient and I install some filters and I make all sorts of transformations and I need €100 million to be able to do that in all my factories. This money will be used for that and only that. And this contract, the bond agreement, the issuing memorandum, right, actually is the guarantee to the investor that the money will be used for sustainable purposes and no other. That’s verified annually by the auditors as well. There’s actually a separate chain that the money goes through that is audited. So that is a very simple description, how a green bond is issued.

And you’re right, investors will accept a lower yield on those bonds. It’s not huge, the difference, but on €100 million that maybe you’re borrowing for five or seven years, it adds up. So there is a huge investor demand for a well structured – well structured is the important point there – well structured green bonds, where the company also on an annual basis is reporting certain data so that you also can see that their emissions are falling. This capex has been invested and actually their emissions are falling, etc. So it’s a mutually beneficial system. A sustainability linked loan is the same situation. But instead of public market investors who have the banks themselves that are lending the money, because companies are generally smaller, they work with a company – sometimes it could be use of proceeds as I explained but generally it’s linking the interest rate – to improvements on certain sustainability factors.

So I mentioned before this advertising agency that if they are considering actually linking part of the loan to. Growth in green advertising. So, green advertising, they will have to decide, but if they think that over the next five years it can become 30% of revenues from zero, because right now it’s at zero. The banks love that! So that’s a new source of revenues. They’re not going to stop their other clients, this is just new growth. Right?
AndrésYeah. This is quite great. It’s good that companies can set goals to become more sustainable, and at the end of the day, is what you said, sustainability KPIs. So it’s super important for companies to be able to measure what they say that they’re going to do, because they need to report it, and this information has to be audited. Right?
AliciaExactly. So that’s very important. So both with the bonds, when you issue bonds, obviously you have audited reports that are available publicly in private companies that borrow money from banks. The bank demands audited financial reports and audited verification of performance on the KPIs. So that’s an additional audit obligation requirement. The company’s auditor just adds that onto their annual exercise. But they need to be able to verify how data is captured, how it is measured, how it is verified is of vital importance to the auditor, who has to verify – they sign professionally that these information is correct – and the bank that relies on that. Taken to its extreme, the financial system depends upon reliable data, whether it’s sustainability data or financial data. And these guarantees are built into the system with the audits profession.
AndrésIt’s been amazing to have you here. Just one question before you go. We’re starting this ATalks. So who would you like to see here? This I didn’t tell you that I was going to ask.
AliciaWell, that’s interesting, Andrés. I think institutional investors, a big institutional investor, explaining how they use this data and what happens when they don’t find the data and whether it’s really affecting their investment decisions, the price, relative value, how they decide whether to buy or hold. I think that could be very interesting.
AndrésOkay, that’s perfect. If you have a name in mind… Because we’re creating this to open the space for people to to understand ESG in all of its forms. And it’s amazing to have you here. I’ve learned a lot today, and I really appreciate it. So thank you very much.
AliciaThank you for inviting me, Andrés. My pleasure.


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