About this ATalk
Martin Nichols is Regional Sustainability Relationship Manager at S&P Global Ratings.
He is a highly motivated client relationship management and sustainable finance professional with over thirteen years of experience in different areas of capital markets.
We talked to him in this ATALK where he tells us:
- How to have a significant impact on your company valuation through sustainability.
- What the future of reporting will look like.
- How a credit rating works through ESG credit indicators.
- What should SMEs that are starting to see that their business is becoming affected because of this lack of sustainability strategy.
If you want to know how the issue of sustainable finance currently stands and how it is expected to evolve, take a look at this ATALK.
Transcript
Joana Alves, Co-Founder at APLANET, interviewed Martin Nichols for this ATALK. You can find the full transcript of their conversation below.
| Joana Alves | Welcome to APLANET Talks where sustainability has a voice. We have created this space so that we can discuss the most important sustainability hot topics and for that we interview relevant sustainability professionals from different sectors and geographies so that they can share their experience with us. Today we are delighted to have Martin Nichols from the UK as a guest with us. And to introduce our guest speaker, Martin Nichols is responsible for Spanish and Portuguese clients and ESG outreach at Standard and Poor’s global ratings. Martin started his career in 2008 at UBS Investment Bank in New York and operations, before becoming senior vice president within the client coverage team at asset manager State Street Global Advisors in London. In his current role at S&P Global ratings, he works with clients to help them access the sustainable finance markets as well as communicate to their key ESG stakeholders through ESG ratings. It’s a pleasure to have you here, Martin, with us today. |
| Martin Nichols | Thank you very much. Pleasure to be here. |
| Joana | So I have a lot of questions that I want to ask you and I want to start your professional journey because you have an international experience in finance. You started your career in New York, you moved to London, now you work in Madrid at S&P ratings. So I wanted you to tell us a bit about your professional journey and how did you start working with sustainable finance? |
| Martin | OK, perfect. And so I graduated in 2008. And so the year to start work was when I started work was September 2008, which was the, which was the global financial crisis. So it wasn’t the ideal moment to be starting working in the finance industry. And so I did what was called a Mountbatten internship which is really quite interesting, especially to maybe anybody who’s listening thinking about the next steps after university. And that was a program that ultimately enabled you to travel so to move from the UK to New York and start working in a company. And for me I was placed with UBS as you said and started in an operations role. So I was responsible for equity trade support essentially and so. The trades that were that were taking place. I was responsible for making sure that they were allocated to client accounts OK. Which something that I didn’t even know existed to be honest before as I left university. But I think it was a really interesting first role to be able to get to start to get a broad understanding of what happens within an investment bank. And so I spent a year in New York, I wanted to move to London being from the UK, so I moved back to the UK and stayed with UBS and did some other different roles across operations and across different products, so across derivatives, across complex structured finance instruments all within kind of the operations part of the business, but I think that was great because it really gives you a kind of thorough understanding of what happens within within the business. And I was studying the CFA and so I I did the CFA and and and after doing that I wanted to move into something which was a bit more client facing and so there was an opportunity with State Street Global Advisors in the asset management industry and decided to make the switch across. And there I was responsible for our institutional clients, so working with our clients to talk to them about the different offerings funds that we manage within State Street Global Advisors. And that was when I think the first sustainability type conversation, you know, from my perspective, really came about. That was when clients, especially towards the end of the time at State Street, clients were starting to ask a lot more about. How we were thinking about sustainability, you know the different fund options that we had that potentially had a sustainability angle in the investment approach or the way that we were screening and stocks are also the corporate governance perspective as well. So that was really when I started to be more involved in sustainability and I then made a fairly big move because my wife’s from Spain and so we decided to move to Madrid. And so I looked for a new role and and and S&P global ratings were we’re looking for somebody to be responsible for their clients in Spain and Portugal. And so made that change which was again a really interesting change because I you know started on on the sell side investment bank and moved into asset management on the buy side and then the credit rating agency you’re kind of in between the two. You’re speaking to investors, but you’re also speaking to companies. And so it’s a really unique position to be in, in the market in terms of what you hear in the conversations that you can have. And really, since I joined S&P Global ratings, the. A lot of the focus in the conversations with clients has been on the sustainability side. Maybe if you went back 10/15 years and somebody who was responsible for clients at a credit rating agency, maybe they would not have any conversations about sustainability maybe all of the conversations we would be about credit and but I can say honestly pretty you know 90% or if not higher of the conversations that we have with clients is sustainability comes up in some form into the conversation. So ultimately that led me to have you know more and more focus on on sustainability and then became responsible for Southern Europe what we do in southern Europe from a sustainability perspective. And you know they’re really interesting conversations that we have with our clients. It can be from an ESG rating perspective, our sustainability rating perspective or it can be about how clients are looking to access the sustainable finance and the sustainable debt markets. And so, yeah, that’s I’d say probably. The last seven or eight years of my career have had a sustainability focus to a certain extent, but it wasn’t necessarily something that I pushed myself towards, I think it was just a natural evolution of the market that someone in a finance role. Would suddenly start having, you know, a lot more involvement in sustainability, which is kind of a testament to where where the markets are right now and the interest in ESG and sustainability. |
| Joana | You have a very unique and rich professional experience because you have different perspectives of how the financial system works and at ATALKS we have our public varies between sustainability experts and professionals that are starting their sustainability journey. So can you please explain why it is the relation between sustainability and finance and why is sustainability risk such a key risk for investors that they have to quantify and that they have to manage? |
| Martin | I think in a way it goes back to some of the things that I mentioned in the first response. Clients of investors or clients of fund managers are putting pressure on those funds to increase their focus on sustainability. And so that means, you know, pension funds, insurance funds and sovereign wealth funds. And all of the individuals that are linked to those institutional investors are really driving the trend towards sustainability being a big factor when investors are considering the risks associated with specific companies. And I think you know one of the, you know this, a significant risk for companies in you know, how they’re perceived by the market from a sustainability perspective and so that can have a significant impact on their valuation. Which therefore means that it’s a relevant risk factor for investors to be considering. I think also there’s a lot of certainly now and there’s a lot of funds which track sustainable companies, whether they’re index funds or active investment funds. And you don’t necessarily want to be a company that falls out of those indices because that can also have a significant impact on your valuation. So that’s certainly the way that I see you know driving one of the driving forces is from the client side and then the other side is you know investors thinking about their portfolios to make sure that from a risk perspective and sustainability has been factored in the right way. |
| Joana | Exactly. And that’s why sustainability information is so important, because it can affect at the end the price of a share or a bond. So that’s why investors have the right to have that information disclosed. So I want to ask you if you think that If investors don’t find that this information is transparent or if there is not enough market consensus, do you think that it will stop them from investing? And how can you overcome this? |
| Martin | Yeah, I think it’s a big challenge. I think it’s a big challenge in, you know, with this sustainability sector as a whole, you know, across, you know, reporting standards and disclosures KPIs. I think what’s happening is, um, the investors themselves are starting to… They started a while ago to build out significant teams within their companies and with a focus to go and speak directly to those companies. I think that’s a way around a way around this inconsistency of data rather than relying upon the inconsistencies of disclosures that companies might make, they are going to speak face to face with companies to ask the questions, to ask the challenging questions that they think are appropriate to ask and to be able to to make investment decisions. I think that’s the, I think that’s the way around it in the short term I think also, you know, regulation will have a role to play in maybe the short, medium term. What that looks like, I don’t know, but I think it’s clear that at some stage it’s going to be more focused from a regulatory perspective on disclosures and KPIs that investors can use to take a view on sustainability. Maybe it follows the credit rating world to a certain extent, which is, you know, a heavy, heavily regulated industry. And there is a clear kind of guidance in terms of you know reporting standards from a finance perspective. And that probably wasn’t the case 50 years ago, 100 years ago. And so, you know, the sustainability piece is on a journey which isn’t obviously as evolved as other parts and I’m sure we’ll get to a point where, you know, regulation plays a significant role in the future as well. |
| Joana | It’s good that you mentioned the different reporting styles because we see that there’s a wide range of reporting styles across the globe and that there is consensual that there is an urgency for the interoperability and harmonization of standards. We know for instance that recently the ISB has announced that they will establish or that they have the will to establish a global baseline but it’s still very difficult and for sure it’s very difficult for investors to interpret all these different reporting styles. So do you foresee that this interoperability of standards for one side and this harmonization of regulation on the other hand is something that will happen soon or we’ll still have this proliferation of information from different sectors and countries? |
| Martin | I think we’d all like to say, yes, that it would happen soon, but I think the honest and seriously, realistically, it. you know, companies are still going to be challenged by having to comply with different types of reporting standards in the short term, it’s probably going to get maybe harder for companies and investors before it starts to get, before it starts to get better. And it’s not just limited to the reporting standards, I think it’s also, you know, investors put a lot of focus also on ESG scores, sustainability scores and sustainability ratings to take views on how well a company is managing their sustainability risks. And there needs to be consistency in that space as well, you know, not just from a reporting perspective, but also the ESG scores and the ESG ratings I was speaking to a bank recently in Spain and in fact it’s not even something that’s unique to that, this particular bank, you know, I’ve heard it from other clients as well that they they participate in 15 different ESG score processes you know with external companies. And in investors trying to look at those different, those 15 different scores, which might be, which might be, which might vary significantly to try and understand and take it a clear view on how the company is managing its sustainability risks. And I’m not sure how feasible that is in the long term from the investors perspective, but also from the company’s perspective. You know the company has to build out a significant team to be able to complete the different questionnaires that they need to be completing and to be managing the relationships with these different ESG score providers. So I think we’ll also see a trend in that space where maybe the 15 different ESG scores that are big, large European bank might have today. Will come down to four or five different scores, or maybe even less which kind of the investment community agree on the right scores and metrics to be able to? To comparably judge across the board how companies are are managing their their sustainability. So, it’s quite varied answer, but I think certainly from what I’ve read with regards to the consolidation of reporting. Yeah, I think there’s the certain areas that they’ve made good progress on. There’s other areas that I understand. There’s still quite a lot of inconsistencies. And I haven’t heard anybody say that those inconsistencies can be easily resolved in the short term. So I think, I think definitely longer term they’ll, they’ll be, we’ll find the right way forward. But in the short term, I think it’s still quite a challenging, challenging space. d other teams coming are going to make Terra dos Soños grow in different way and that’s why I left basically. |
| Joana | Totally agree. I think that there’s a long journey still ahead of us and it’s great that you just mentioned ESG scores and ratings. I think there is still lack of knowledge even in the sustainability field about what is the concept behind ESG scores and I mean you work for a Standard and Poors ratings that doesn’t need introduction. So can you explain us what is the rational and the methodology that you use at S&P Ratings to build your ESG scores and this analysis on environmental, social and governance practices? |
| Martin | Yeah, you could argue that we also don’t help with the complexity of the environment, because we do a lot of, we do, we do different things. OK, so it’s not just a single ESG score and it’s part of my role to educate the market and educate our clients and investors and banks. What each of the different kind of sustainability scores that come out of S&P global ratings actually means and what and what it’s looking at. So you know, very, very high level we do. What we call ESG credit indicators which fits into the credit rating part of what we do. So we rate companies from a credit perspective. But we also want to give transparency to investors around what are the ESG factors that are contributing either positively or negatively to that credit rating. So that’s kind of an enhanced transparency exercise where we include a part within our credit rating report to show to the market and the ESG factors. But then you go to the other end of the spectrum and we also there’s a lot of companies in Spain which have a public ESG evaluation and with S&P Global ratings. Um and that’s much broader than simply the ESG factors that could impact the credit rating. That’s looking at all of the ESG factors that are relevant the short, medium, long term for a particular company and it’s and and the stakeholders of that company and so different, different things. We’re also seeing a lot of focus on sustainable finance at the moment and in that regard you might see S&P global ratings doing a second party opinion which rather than being specific to the company is actually specific to a financing. And a company going and issuing a green bond or doing a sustainability linked loan and S&P global ratings does a second party opinion to confirm to the market that that financing aligns with the principles of sustainable finance to give more clarity to the market that assurances to the market that it’s following the best practices and that greenwashing isn’t present and that there’s more visibility to the projects that have been financed. And then within S&P Global as a whole, you know, there’s a whole other raft of areas where we’re working with clients within our sustainable one business to help clients, investors, banks with them with their sustainability challenges as well. So it’s really quite broad. And I think you know the key, the key area where we’re going to see growth this year and you know we’ve already seen a lot of growth is in the sustainable finance piece. You know, we’ve seen the sustainable finance markets evolved significantly in terms of the amount that is issued I think 2022 which was a which was a challenging year from an issuance perspective because of the markets in general and over 12% of the market of bonds issued were sustainable bonds which you know which is which is a big which is a big piece of the which is the overall market and we expect that to to continue to to increase over the next year or two. |
| Joana | I think that’s sustainable. Finance is definitely there a hot topic nowadays and I think that we can all agree that there has to be a… there have to be standardized KPIs on sustainability so that it’s easier from an investor’s perspective to evaluate the risk of an investment from a sustainability standpoint so and and that’s the rational behind the new European Union taxonomy and this list that they created to consider which economic activities are considered sustainable and to give incentives to move the money towards this activities. So can you explain broadly how does the EU taxonomy work? And in your opinion, do you think it’s enough to move the money towards a sustainable businesses? |
| Martin | Yes, so I think, well, the EU taxonomy is… I guess Simply put, is a classification system for sustainable for identifying projects which are sustainable. So there’s six sustainability objectives within the EU taxonomy and so companies will be going through a process of demonstrating which parts of their business and potentially align with those six sustainability objectives within the EU taxonomy. And also from a financing perspective, from a sustainable financing perspective and which projects they are financing align with those sustainability objectives of the EU taxonomy and so, a company going to do a financing and looking to align that with the EU taxonomy would need to demonstrate that the the proceeds align with one of the six or more, one or more of the six sustainability objectives. That they do know significant harm that particular project that they’re going to finance does no significant harm to any of the other of the six sustainability objectives and that they also complies with the minimum social safeguards that are in place. So in theory you know it makes a lot of sense this classification system exists and it would make interpretation of the sustainable finance markets simpler, or at least that’s the objective. And I think it’s the right, yeah, it’s good evolution of the markets. You know we’ve as we mentioned before, we’ve already seen a lot of sustainable finance. But I think these types of classification systems will only help the transparency. And will only help the markets grow, I guess the challenge is. Is what it actually looks like and what it means for companies to be able to to comply so I guess you don’t want to have a regulation which is so complex to comply with that actually it means that the companies that might have considered doing a sustainable finance activity no longer pursue that because they might think the costs involved in doing it prohibitive. So I don’t necessarily see that as being an outcome, but I think it is something that’s important especially you know some of the companies that are looking at sustainable finance for the first time and there’s a lot of established large companies that have been issuing sustainable finance, sustainable debt for a large period of time. But then there’s a lot of smaller companies which are taking their first steps in this space. But I think it’s a positive thing, I think a classification system which is universally or universally across Europe and used intuitively makes a lot of sense and I think it. You know it, it’s still to be fully defined which is a, which is another thing I think from a perspective of “We don’t yet see that many companies and that are seeking to be aligned with the EU taxonomy for their financings because it’s not fully defined essentially”, but I think that will that will change over the over the coming months or year or so. |
| Joana | Totally agree. And it’s definitely important that there is a systemic change, so all the players have to be involved from governments to the finance sector and if the money moves towards sustainable activities, it will be easier for companies to have support and to change their business models. And so that’s a good thought to bring you to the next question which is it’s very difficult for companies especially companies for SMEs and companies that are still starting their sustainability journey to conciliate this pressure on short-term profitability with long term sustainability. How can you, how can companies make this trade off successfully and do you think that sustainability can mean profit as well? |
| Martin | And yeah it’s, it’s yeah, it’s a good question. I think there’ll be periods of time where the long term sustainability objectives of the company can align quite nicely with the short term profitability of a company. Um, and there’ll be periods where that becomes challenged based on the economic environment that the company is, that the company is working through. And. Yeah, there’s a lot of regions of the world will potentially move into recession during 2023. That will put a lot of pressure on the short-term on companies. So potentially during that period. Potentially some of the longer term sustainability objective objectives may be delayed. They may be postponed. But I think that’s normal through the normal business cycle. As I said, there’ll be periods where there’s alignment and there’ll be periods where there be less, less alignment. So, it’s definitely a challenge for companies and. But I also feel as though it’s that’s normal. You know I think it’s normal in a period where it’s a complex economic environment. The company has to focus on the short-term, short-term profitability because it’s not going to be very sustainable if it doesn’t focus on its short-term profitability because it might not last beyond two or three, you know years down the line and then it would be impossible to carry out the sustainability objective, the long term sustainability objectives. So yeah, I think the two can work together, but not always if that makes sense, not always to the same extent that they might be able to in more favorable market conditions. And I think this year will be interesting to see. I think there’ll be. You know, they’ll be, I think, post COVID or yeah, post the pandemic or in the year or six months after a lot of companies and really spent a lot of time. From a social perspective, in terms of how they manage their employees and their rewards for employees. I think a lot of companies took a lot of steps forward and… But will they be sustainable? Will they be able to maintain those? Those social aspects that they put in place in a challenging economic environment, which is the point. So I think that I think they’ll then this will be an interesting year to see how that plays out. And then also equally the challenges that we know from an energy perspective and again. You know be interesting to look back on 2023 and see afterwards how that’s longer term sustainability and short term profitability is worked in practice. |
| Joana | It’s definitely a challenge, especially for countries such as Portugal or Spain that are comprised of SME’s. Because if you are a large company and if you have to comply with the non Financial Directive, and if you have resources in house resources, if you have a team of sustainability professionals, professionals is easier, right? But if you are an SME and if you are struggling to survive and if you have a limited budget. And with the crisis it will be difficult to make these choices and to make sustainability as a priority. But I think that also on the other hand, if they, if this company is even the SMEs if they don’t change their business models into a sustainable one, they will disappear eventually because if they are in a supply chain of a larger company that has to comply with this criteria if they do a due diligence, they will be out of the market, let’s say. So what advice would you give to SME’s in Portugal or in Spain or across Europe especially, that are starting this sustainability journey that still don’t have to comply with the directive, but that are starting to see that their business is becoming affected because this lack of sustainability strategy? |
| Martin | Yeah, no, it’s a, it’s a good point and also the point around, yeah, supply chains and these SME’s continuing to play a role with the in those supply chains and having to comply with sustainability to do that. I think that, you know, it starts with raising awareness internally and so as you say some of these companies won’t have the scale to be able to have a specific sustainability division or team or even person, but I think there can still be perhaps establishing a committee internally around sustainability and thinking about some action points that can be taken within the company working externally to the extent possible. You know obviously you mentioned that budgets can be a challenge but I think you know working with consultants to learn and take, take or put in place in a pathway to be to be taking steps in the future. You know is all, you know, really useful things to be able to to embed sustainability thinking within the company. But I completely agree it’s a challenge. It’s just, it’s a challenge from a budget perspective. And it kind of goes back to those earlier comments around, you know companies that have have to have or have had kind of 15 different ESG scores publicly, you know that needs to come down so that so that these SME companies can start to get on that ladder and and start to have their ESG scores as well. And there’s a lot of companies, I guess SME companies are probably been included more often than they potentially were in the past that are invited to do sustainability questionnaires. Where they can populate data from their business into these questionnaires and then see a a score from that come out and in many cases they there’s not necessarily a fee or a cost associated with those and so I think that’s also a useful step for a company to take because it can to start to pay attention to those because you can build up a knowledge base internally of of what are the questions in these types of questionnaires because that’s the type of information that ultimately investors and reporting standards are requiring as well. So they can start to maybe think about, OK, so this questionnaire is asking companies to report water usage or waste for the past five years of operating and that SME might realize that they haven’t, you know got tools in place to track that metric and so they can you know start building the the thinking internally around how to go to the the next level. |
| Joana | Think that is great advice for all the SME’s that are listening to us and that are going to start their sustainability journey because there really has to be a systemic change in all companies are important for sustainable development. So it’s important that they have the right tools and advice to start shifting their business model into a sustainable one, and in your opinion with all these challenges around sustainability and businesses, what do you think is the role of technology as a lever to sustainability? |
| Martin | Yeah, I think. Yeah, technology is obviously key for companies not just from a sustainability perspective. But it can play a significant role. It can play a significant role in helping to potentially reduce the costs associated with some of the sustainability demands that companies have and I think that’s probably you know the key area that it can that it can help, it can, it can help make things simpler internally for companies and it can ultimately hopefully lead to an efficient structure have been able to comply with all of the different future reporting standards and current reporting standards, future demands from investors, future demands from stakeholders in a consistent and clear way without putting too much you know, and too much too many restrictions on how the company operates. So yeah, I think there’s definitely a role and I think we’ll see more and more startups, more tech based companies starting to be more prominent in the sustainability space over the next over the next few years for sure. |
| Joana | Definitely. And if technology can serve sustainability, like making the sustainability management more efficient, companies can save time and resources and can dedicate themselves to make their sustainability strategy more adequate and better to generate a better impact, right? |
| Martin | Agree. Yeah. |
| Joana | That is perfect. And when Martin to finish to wrap up, we always ask the same question to our guests. Who would you like to be here interviewed at ATALKS? |
| Martin | And so I am, so we, yeah, I haven’t got a specific name, which, sorry, I haven’t got a specific name, but we, you know, we speak, we speak a lot to clients, to companies. And then today, you know what, a lot of the conversation has been kind of me sharing views on what companies say to us and also a combination of my perspectives based on those. But I always think it’s fascinating to have an actual company, large or small, somebody who’s responsible for sustainability and to talk about how on a day-to-day, how it is in, what are the impacts on a day-to-day basis of all of the things that we’ve discussed today. So I think getting someone who can, who can do that would be really interesting for everybody to listen to, I’m sure. |
| Joana | Perfect. We’ll make sure to bear in mind your suggestion for future ATALKS. It was great to have you here. Thank you so much for your most valuable inputs and for everyone who’s listening. I hope you have enjoyed it and see you in the next ATALK. Bye bye. |
| Martin | Thank you. |
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