ESG: Measuring Non-Financial Risks. Interview with Andrew Gazal

This is a transcript of the podcast interview recorded for Sustainability Explored on 6 of February 2020.

This is Season 2 Episode 19.

You can listen to it here, or join on any of your favorite podcast platforms.

Anna: [00:00:07] Hi and warm welcome everyone to Sustainability Explored, a podcast where we discover and explore different shapes and angles of sustainability in business and economy.

A place where we make complicated concepts easy and understandable, where buzzwords like climate change, environment, green economy, and so on finally start making sense.

This is the 19th episode, Season 2.

Today I’d like to look at the ESG that stands for Environmental, Social, and Governance — three central factors in measuring the sustainability and societal impact of an investment in a company or business.

These criteria normally help to better determine the future financial performance of companies such as return and risks. But how exactly does it work?

Of course, there is no better way to find out about these things rather than directly asking a professional working in this field.

Therefore, for this interview episode, I invited Andrew Gazal- a founder of “ESG Tech” — a new technology solution to support frameworks like, United Nations Principles for Responsible Investment, Principles for Responsible Banking, United Nations Sustainable Development Goals, TCFD (or Task Force on Climate-related Financial Disclosures) and SASB (Sustainability Accounting Standards Board).

“ESG Tech” is a platform which simplifies ESG reporting for corporations in all sectors. And I’m very excited to invite Andrew today to be my guest at this podcast. He will tell us everything that he knows and will share his wisdom on ESG.

Before we start here is a short musical pause for you.

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[00:02:13] My guest today is Andrew Gazal. Welcome, Andrew. Thanks for joining Sustainability Explored today. You can briefly introduce yourself before we kick-off.

Andrew: [00:02:25] Terrific. Well, first, thank you for having me, Anna. It’s a pleasure to be here.

My name is Andrew Gazal. I’m the CEO and founder of ESG Tech.

ESG Tech is a bespoke cloud-based platform, where we simplify ESG reporting for corporations. And our overall goal is to be able to structure and aggregate data collecting for investors and banks in order to refine risk and investment tools.

Anna: [00:02:48] How did you get to this topic? Are you a trained environmentalist? What’s your background?

Andrew: [00:02:55] Yeah, so I’m an engineer by trade. I studied Naval Architecture, which takes care of anything on the water or beneath the seabed.

I spent over 10 years in the oil and gas sector, so a high-risk heavy industry sector, where I was focused on operational risk. So very much looking at operational risks of projects all across the globe.

With that in mind, later in my career in oil and gas, I was then tasked to investigate and find projects in emerging markets where we would need to look at financial risk from the “borrower and lender” scenario or investors and operational risks from a commercial perspective.

And with that, we started, I started to see that questions were being asked from the stakeholders about ESG or Environmental Social Governance.

And very early in my career I was like, okay, well what is ESG? And very quickly I found out that it’s essentially operational risk but focusing on metrics that are specific to an industry.

So, with that in mind, I set on my ways to leave the corporate world and begin ESG Tech where we’ve helped communicate ESG between corporations in all industries and sectors with the financial markets.

Anna: [00:04:06] Oh, very cool. Did you have any tech background, or do you have any other people in your team dealing with that? How big is the team also?

Andrew: [00:04:16] Yeah, so I have a CTO who is also now a co-founder. His name is Austin Chaird, who has 15 years of experience building enterprise software for the banking sector. So, he’s worked for lots of… Macquarie Bank, JP Morgan.

Together we complement each other in the sense where he understands technology stack and how financial markets deal with legacy systems and an interface with corporate clients.

Where on my side, so over the years I’ve expanded my knowledge and understanding of operational risk into quite a few industries: oil and gas, mining, apparel, renewable energy. Everything that essentially is topics of today, is something which I take my engineering and analytical thinking and puts an ESG lens on it for the financial markets, so that they can see operational risk in the metrics that they look at.

Anna: [00:05:10] Speaking of the financial markets, by the way. In which way the financial markets, the banks would need ESG (Environmental Social Governance) data? Why?

Andrew: [00:05:22] Yep. So, the way that I look at ESG, I actually assess it as what we call non-financial risks. So, everything that’s not found on the financial balance sheet.

In my personal opinion, I think that we will soon see financial reports, being called Corporate Reports, and they will have both: financial statements or financial content and non-financial risk content, which is the ESG component.

And the reason for that is because for a business to truly be understood and seen its operational skills and risk, you need to be able to overlay both the financial content and the risk of a business.

And those risks now are just being brought into the environmental, social, and governance. So, whether it’s risk or opportunity, the now metrics, which for a long time were not asked by the financial sector, was very much understanding: P&L of a business, liquidity, debt- equity ratios and comprising and understanding in a rating of the company, purely based on those financial criteria.

Anna: [00:06:22] Yeah. And then, how did they start to merge and why? Why should they be motivated, the companies and the banks? Why would they be motivated to look at the nonfinancial data?

Andrew: [00:06:34] So, in my opinion, I think the reason why the financial markets looking at this is stakeholder pressure. We’re seeing large multinational banks being pushed from their major stakeholders, which in most cases are pension funds, mutual funds, sovereign funds, to say that you as a bank or as at least of the board, have a fiduciary responsibility, not only to provide profits to shareholders but also to ensure that it’s done in a sustainable manner.

And when they talk about sustainable manner, it looks at the longevity of a business and what its impacts will have on environmental metrics, social metrics and governance in terms of how they run and operate their business.

Anna: [00:07:16] Stakeholders was a big topic at this year`s World Economic Forum. And yeah, we start to focus more and more on what other people want, the communities globally.

I wanted to ask you from your experience with ESG Tech, how easy it is for companies and banks that you are working with to perceive this information, to really say: “Yeah, you’re right. We also feel the pressure from the stakeholders. We want to operate in a sustainable way. We want to include other metrics.”

How do they, you know, how easy do they react globally or not? And where are mostly your clients based?

Andrew: [00:08:03] Yes, so I think from a banking perspective, I think you need to divide it into two categories.

There is the ESG component of the bank themselves as a corporation. So, you’re seeing how they’re ranked on “RobecoSAM” against their competitors.

But then there’s more of a push now for a bank to place metrics in the ESG format or nonfinancial risk on deployed capital. So, debt or credit lending and what the effects of that funding does to the environment or to society.

That second part is quite key. And that where we focus at ESG Tech is.

Last year, the United Nations Principles of Responsible Banking were released and there are several principles under that framework, but one of the main principles is for banks to set KPIs and targets and then to show and publicly disclose their efforts to achieve those targets.

And we’re moving away from banks looking at, “okay, the energy consumption for branches and main offices” to now looking at “well, are we supporting sustainable or non-sustainable businesses?” And can we help these businesses transfer to sustainable products or sustainable service. And then look at limiting or expanding lending products towards them.

And the best way I feel that to do that is obviously always by incentivizing corporate clients. So, we all know that corporate clients react best when cheaper capital is offered. And we hope to see those mechanisms come to play where being sustainable and setting KPI linked loans will then offer corporates to receive discounted capital, which then from a financial perspective would help their business thrive as well.

Anna: [00:09:50] So, do banks impose the ESG reporting on their clients or not?

Andrew: [00:09:57] So, to this day, we’ve seen, and our market research shows that banks and NGOs have more of a criteria per industry where they have a “yes or no” scenario or survey where they ask corporates “Do they have a ESG strategy? Do they select specific metrics? Are they tracked? What’s the framework in terms of liability? And who’s responsible at a Board level, at a C-Suite level, and at a Management level?

But we’re not seeing, apart from the few new KPI-linked loans where there is quantitative metrics that are set by banks or set with their corporate clients and link them to get facilities.

So, if they don’t achieve the KPIs, then there’s penalty fees. If they do, they continue to benefit. In the case that I mentioned before, for instance, discounted capital or extended credit lines.

Anna: [00:10:54] You mentioned metrics couple of times. I think for the listeners it would be beneficial to know, how can exactly you measure environment? Like environmental part of your business, social and especially governance? Even, I’m confused on the last one.

Andrew: [00:11:16] Look, that’s a great question. And at “ESG Tech”, we’re a big advocate for SASB, which is the Sustainable Accounting Standards Board.

It’s a non- for- profit organization that was set up in the United States and it took seven years to develop. And the reason was that they went about setting a framework that creates or selects metrics that are industry- specific and investor focus.

So, there’s over 90+ industries that essentially any corporation can be categorized into. And then they determine metrics that best suit that industry for what the financial markets would be interested to look at from a non-financial risk- perspective or again, ESG.

An example of environmental: we all know of greenhouse gas emissions. So, looking at how much a corporate emits Scope 1 emissions or Scope 2. But as I said, depending on the industry, that may not be a critical factor for an investor to look into for a specific business.

Another one, which is of topic recently is water management or water stress. So, does your corporation or does the industry consume water for its operational services? And how is that managed?

From a social perspective, it’s very much looking at gender equality, looking at male- female ratios within board-levels in management, looking into an ethnicity, so, looking at native content versus ex-pats, for instance.

And on the governance side, very much looks into controlling factors when looking at framework. So again, we mentioned before, the importance of the board these days and the fiduciary responsibility to shareholders and to the company.

So, governance starts to play a role where we see board members have that responsibility to ensure that “I’m C-Suite, at C-Suite we have a framework in relation to ESG and have integrated within the business.”

And then those operational risks are key metrics looked at and reviewed by C-Suite in order to ensure that the business is seen as being sustainable, both to the environment, society.

Anna: [00:13:21] I’m curious here, are any social, corporate social responsibility activities done by the company somehow included into any of the three categories? Social, probably.

Andrew: [00:13:35] Yeah. So that’s a great question and I think it can come down to people’s opinion, but I’m a believer, and I think it’s from high engineering backgrounds that ESG and CSR are very different things — to a corporation and to an investor. To the public, I should say, not just investors.

So, with ESG, I keep coming back to being industry- specific investor- focused metrics. So, we mentioned about GHG emissions, water stress, gender equality.

But then with CSR, it’s a Corporate Social Responsibility. This is where I think that companies doing good in the sense of donations, sponsoring of teams, helping local communities. This is where there’s an outreach.

But in my perspective, that CSR has a material impact to, for instance, publicly listed companies. So, therefore, share price performance or the risk to lenders in terms of, say “a bank in a corporate relationship”.

So, they both have a part to play. But it is important, I feel that corporates don’t (particularly SMEs that are coming into this space and learning about ESG and sustainability) don’t mix these two up because they are very different, but they both serve a purpose.

Anna: [00:14:51] That’s very important that you tell it to me.

This year World Economic Forum in Switzerland. The summit shares the awareness that standard business practices need to change if companies and people they employ are going to survive this century. That was actually the beginning of the summit.

It started off with the question. “Are we going to survive through this century?”

And for example, the session called “Make an ESG reporting more science than art” address the simple idea that we lack a consistent set of standards for measuring how companies perform on non-financial part. What’s your take on that? Should ESG be science or art?

Andrew: [00:15:38] Definitely science. Not arts. Leave CSR to be the, I wouldn’t say art, but the immaterial component when it comes to material disclosure.

Again, this is why when we researched and looked at ESG Tech at the 200+ frameworks created by various non-for-profit or for-profit organizations, that we keep leaning towards SASB because it has these metrics that are qualitative and quantitative.

So, it takes away, for instance, the guessing work of a corporate who may not understand exactly what they need to report on and therefore gives them a clean and cleaning concise protocol to follow.

You’ll be very surprised that a lot of these metrics, again, in SASB, are already connected to metrics that a good business practice already covered.

So, we look at, again, operational risk, that these are metrics that a good business would be monitoring in order to ensure that their business is functioning at its best and optimal capabilities.

In terms of your comments related to ranking of companies and ESG reports being more generic -I have a challenge that sustainability and the ranking systems of the past (we look at the large players: S&P, Moody’s) played its role in the last hundred years of helping people who didn’t have the ability to find out and research for themselves just how good a business can be.

And I feel that we need to be moving towards benchmarking of companies based on granular level metrics. What I mean by that is normalizing data so that we can look at, for instance, the agricultural market and compare a $2 billion company with a $100 million company by looking at how much GHG scope or emissions released per ton of crop.

And that’s something which then gives the freedom to the investor or to the reader: to determine and wait which metrics are more important to them, whether it be an environmental, social or governance.

And move away from a third party body, selecting, which is more valuable and wait to innovate that, then we get the score of A++, A-, B- because yeah, it seems to be more of a data process, in my opinion.

Anna: [00:17:56] What is this “A++”, “B-”? Who’s ranking it is?

Andrew: [00:18:00] So that’s the current standards we see, is that it takes into account various metrics and then provides a scoring for a company. So there’s the RobecoSAM`s scoring, there’s Moody’s, S&P, CRA finitive. They all have their methodologies to Sustainalytics to rank a company against its peers.

But again, that would mean that certain metrics need to be weighed against another metrics, which then has, without trying some form of bias opinion as to what is more important than others.

Anna: [00:18:33] Okay. And this is something you include in the ESG Tech. How does the platform work?

Andrew: [00:18:40] No. So, we don’t include any rankings as such.

We’re very much focused on benchmarking. So, our platform works by any corporation logging on and able to create their own industry report using the SASB framework.

They go through a tutorial process. Which tells them the protocol and it gives them the ability to fill in the information requested.

At the end of it they’re able to print a report and then periodically create a new report and see the trend lines for individual metrics. They can start to look and see whether they’re improving, I mean a positive or negative, way for specific metrics.

Our goal is to, once the data set grows inside, is for a particular corporate, then to select a metric (so again, we use agriculture as an example) and then for them to look at, okay, well what is the mean average for a particular region for GHG emissions per ton of crop, particularly for the crop that they’re growing. And then they will be able to see where they sit on a graph or a dot-table of where they sit in comparison to their competitors.

The data remains private, but they’re able to then get that to direct insight to understand are they above the mean average, are they below the mean average, the top of their class, or at the bottom, and then they need to improve.

Anna: [00:19:57] This kind of reporting… I know that sustainability reports and climate reporting is still voluntary. Right? When do you think and what should happen for this sort of data to become compulsory?

Andrew: [00:20:12] Yeah, that’s a great question. We see that there is, for a better word, “compulsory requirements” from some of the stock exchanges, however, the details which they ask to provide purely, I would say, in accordance with GRI or in accordance with SASB.

The second part where we see is the EU tax on meat, where we’re seeing regulatory requirements come into play in Europe, where companies are now having to disclose, say for instance, their GHG emissions or their water consumption.

My push and my drive is that more and more companies report if there is that incentive. And that’s why at ESG Tech we focus on building relationships with multinational banks where they use our platform to create a communication piece between their corporate clients in order to offer the corporate clients a better service.

But at the same time be able to, again, incentivize them by de-risking them on their own balance-sheet and then providing them with, again, the option of potential discounted capital or extending credits, because they’re able to provide such information to do so.

Anna: [00:21:14] Out of curiosity, which countries are the most advanced according to your data, like your internal data, in terms of ESGs and reporting, and enforcing this on the companies?

Andrew: [00:21:29] That’s a very good question. We see that this is a been a talking topic for Europe for the most period of time and then followed by the US. So just naturally over a time period we see more companies within Europe disclosing that information.

However, an interesting fact, which I’m a big supporter of, is that we’re seeing material disclosure in the form of ESG reporting being a great communication piece for foreign direct investment.

So, a way for Southeast Asian countries where ESG Tech is located, in Singapore, is a way of then to communicate with foreign investments -to show them that there are metrics, this is how we are performing.

And provide that level of transparency that company, the first world countries, sorry, first world regions like Europe and the US, look for when they’re investing in emerging markets.

Anna: [00:22:21] And this is really becoming a trend. I think this is where it becomes sort of compulsory, even though on the level of perception, something like that, it’s not compulsory by law, but the foreign investors will look into your nonfinancial data before taking the final decision.

Andrew: [00:22:40] Very much so. So, there is a benchmarking system called “GRESB” and it focuses on real estate and infrastructure.

And we’ve seen over each year GRESB had more and more real estate and RIC funds donate their information to then be ranked. And it was interesting to hear that a big reason for that was that if you weren’t on the GRESB`s list, then asset managers weren’t going to take you into consideration.

So, it’s almost kind of now having to have that public notification that we’re okay with being transparent and if not, then asset managers are asking the question, well, why aren’t you?

And if there’s not a legitimate reason behind it, then it’s only going to have a negative effect on your business when looking for finance, for instance.

Anna: [00:23:27] What a cool time we live in now that it’s becoming like, you know, people themselves reinforce this sort of data because they want to know, they have to know. And their decision really depends on this.

Andrew, what’s your understanding of sustainability? How do you see what it is?

Andrew: [00:23:50] In my opinion, sustainability is longevity in business. And for business to be here in the future, they need to be looking at internal risks, external risk.

So, as I mentioned before, I am engineer by trade. So, looking at operational risk is what I did day in, day out. And there is a key reason for that, I was to ensure that, you know, projects were completed safely, but would exist in the future. And I think that’s a key part.

When businesses now hear the word sustainability, it doesn’t necessarily need to be green, for instance, straightaway. We know that there are industries that cannot be green.

We look at mining, for instance, you will have people say that there is no way a mining company can be green. But it doesn’t mean it can’t be sustainable for the current economy.

And that’s a key driver to, is that we can’t blacklist particular industries for the sake of it, because they’re not green, unless there is technology ready to replace it and allowing those businesses to evolve into a new form of business.

It’s a challenge to just completely ban something without there being a replacement for society to continue forward with.

Anna: [00:24:57] Nice. Probably the last question for today cause I’m still full of questions. Let’s say I have a company or okay, the company exists. They keep on hearing “ESG”, “climate reporting”, “sustainability reporting”, “important”, “investors”, “stakeholders”, and they are lost in all of these buzzwords.

They don’t know where to start. What would you suggest? Let’s say they are really committed. They want to start, you know, touching and tasting this ESG data of their own.

Where do they have to start? What would you suggest them to do first? And at which point should they approach you or ESG Tech platform for help?

Andrew: [00:25:48] I think starting where corporate would start. I would say logging on to SASB.org looking up their industry and sector that they operate in, and then having a look at the industry- specific investor focus metrics that SASB selected for them.

And there’ll be amazed to see how many of those metrics should already be KPIs that they’re tracking from an operational perspective.

Once they see that, then I’m, I think there’ll be less alarmed about what the next processes will need to be. And that’s where we try to jump in.

So, providing them a cloud- based platform for them to start to track all of their metrics and take that data and then turn it into insights.

That is one key point where we try and work with corporates is that it’s one thing to do an accounting exercise and aggregate the data, but the best thing next is then to gain insight from that, and that’s what we hope to do with each and everyone of our corporate clients.

Anna: [00:26:45] Thank you very much, Andrew, for the interview, for sharing with me your insights. It really cleared a lot of confused information in my head. I hope listeners will enjoy it too. Thank you very much again and have a great day.

Andrew: [00:27:00] Terrific. Thank you very much, Anna, for having us on your podcast and look forward to talking to you and your listeners again soon.

Anna: [00:27:07] Thanks. Ciao.

[00:27:10] Thank you for listening. I hope you enjoyed this episode. In case you still have any questions or suggestions, how to explore the ESG topic more, please approach me or Andrew.

Let us know your feedback. We would be very happy and excited to have your feedback.

If you like the podcast please leave a review rate, comment on the platform you’re listening on (I guess we are now available on 11 platforms).

It helps other people to discover the podcast and your opinion certainly matters. Thank you for listening. And until next time.

Take care! Stay sustainable!

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Podcast host Anna Chashchyna

Episode guest Andrew Gazal

Transcript editor Anna Kharybina