Note: Daniel Klier’s title has been changed since the recording of this interview.
Prickett: Hello members and friends of World Environment Center; this is Glenn Prickett, WEC’s President and CEO, and I am very pleased to be here today with Daniel Klier, the Chief Executive Officer of Arabesque S-Ray. Arabesque is one of WEC’s member companies—very interesting company with an exciting new product they have launched that’s very relevant to some of the challenges that our members and other companies are facing in sustainability. So Daniel, thank you for taking some time to tell us about ESG Book, the new product that you’re launching now; and before we dive into that, maybe tell us a little bit about the company, about Arabesque, the role you play in the sustainability arena, and also tell us a bit about yourself, your career before this and how you came to be CEO at Arabesque S-Ray.
Klier: Glenn, thank you for having me on this program today. So, Arabesque S-Ray is a company that is trying to fix one very fundamental problem. We know capital markets need good ESG data to allocate capital efficiently to more sustainable outcomes, but we also know that what we have at the moment is not good enough. We don’t have enough transparency; we don’t have enough data, and many investors don’t have the tools to really assess how sustainable a company is—how much of it is true versus story, how much is good on the top level, but when you look into the details, you may find a different story. And that’s really what our Arabesque S-Ray does; we provide ESG data and tools to investors to make the right capital allocation choices. We use people and technology to get that through our data, and I think that’s what, also for, probably for this group or the members, is interesting. We’re doing it in an incredibly transparent way, because we believe sustainability would only be successful if we all sort of trust the data and the underlying metrics.
I came to this because I spent the last ten years at one of the largest banks in the world, at HSBC I’ve built HSBC sustainable finance offerings—I wrote my own job profile many, many years ago when this was a very, very young topic. Now it’s everywhere, and frankly, I found myself on too many panel discussions, complaining about the lack of data. You would always say, “We could do so much more if we had better data.” And it was just very, very clear to me, there is space to improve; there is space to make a contribution. And so I joined Arabesque, as the CEO, middle of last year to help the company grow. We are a three and a half year old company, have a hundred and fifty people around the world, dedicated to, to do this topic.
Prickett: Great, thanks Daniel. And Arabesque last year, and WEC together put on a roundtable on the rise of ESG investing, what it means for companies, and it’s certainly, then, one of the big stories of business, in general, and finance, in general, of the last several years. And as you just described, ESG Book may solve or help to solve two big problems we identified in that round table. One, the companies themselves are overwhelmed with a lot of competing requests for information, from investors and analysts. And number two, that a lot of the analysis that comes out of that is maybe not so useful to investors, because it’s not very transparent, the underlying methods aren’t very clear, and in many cases there are still data gaps. So I think, from what I understand, ESG Book is trying to deal with both of those problems. So, let’s make it a little more practical. Let’s first think from the perspective of the companies; so I’m a sustainability executive at a company that is trying to provide data on my company’s performance to the markets. How will ESG Book help me in that role?
Klier: Yeah, so I think that both observations are absolutely right. We have quite opaque ESG metrics that tell you, frankly, not enough. And second, if you’re the chief sustainability officer, and increasingly, the CFO, Head of Investor Relations of a company, you get bombarded with forty, fifty different Excel questionnaires. You also get bombarded with a new acronym everyday, right, because the moment, the solution to a problem is to create a new coalition to create the new standard. The good news in all of this is, everybody is asking you for the same information, maybe slightly different terminology, maybe slightly different way of presenting, but we’re all interested in the carbon footprint. We’re all interested in the measures companies are taking to achievement zero. We’re all interested in how diverse management teams are and how diverse boards are. We’re all interested in how companies deal with human rights issues—whether the chairman is an independent chairman or not because it’s a good sign of good governance.
And so what we do, we collect a fairly large number of ESG raw data points, and we also enable companies to disclose relevant ESG, we call it raw data, so the real underlying drivers of environmental, social, and governance performance. And then we allow companies to express it in different standards. There’s obviously SASB, there’s GRI, and then the WEF metrics, and the, the UN Global Compact assessments, but all they are asking you is a slightly different type of the same questions. And so the way to think about ESG Book for a company is: it replaces forty different Excel questionnaires; it puts in place a central data architecture for ESG information, where you host essentially your ESG data; and then it allows you to present your data in all the different frameworks. We’ve integrated something called the reporting exchange; it was developed by the World Business Council for Sustainable Development, and essentially, it’s a unique piece of IP because it has mapped all the different KPIs. So, when you’ve filled SASB, you’ve answered ninety percent of the WEF metrics, and if you’ve filled GRI, you have most of what you need for TCFD. It’s just not presented in that way, and that’s what ESG Book allows you to do.
The other thing that ESG Book then allows you to do is you can share it. You can share it with the stakeholders that need it, those are sometimes investors, that are increasingly banks that are often now your customers because if you are in a supply chain, you’ll become part of a bigger net zero commitment of somebody that you work with. And so, instead of answering forty different Excel questionnaires, it’s like, let’s call it the LinkedIn profile of a company, and you can share it with the relevant stakeholders that you deal with.
Prickett: Terrific, and now let’s go to the other side of the table. I’m an investor. How will ESG Book help me as an investor?
Klier: Yeah, so investors at the moment have been through a journey of, let’s call it ESG integration, ESG commitments. And in the first instance, it’s very often meant using a single ESG metric, an ESG score, and ESG rating to integrate it into your investment process. And while there was a really nice logic following sort of the idea of a credit rating, it has quite a few downfalls. The biggest downfall is that a credit rating essentially has a single purpose. A credit rating wants to tell you how likely is it that you will ever get your money back. An ESG rating doesn’t have that single purpose because people use ESG date for very different use cases.
Some people want to use ESG information to identify the next up-performer, the next company that’s just really good in managing non-financial metrics, and that’s actually, that actually is a good manager. Other people want to use ESG data to identify risks. Where’s the next corruption problem? Where’s the next human rights scandal? Where’s the next environmental damage that I would want to avoid? Other people will want to use ESG data to deliver outcomes—net zero is an example, right? “How do I construct a portfolio that aligns with the Glasgow commitments, with COP26, the Paris goals?” And very other people want to use ESG information to measure impact. “What’s the carbon reduction I’ve achieved?” “How many jobs have I created?” And so you see the four very, very different use cases that want to use the same data but in very different ways, and trying to put that all into a single score that you can’t untangle is really not very useful.
And so, what ESG Book allows you to do, is you get to see your score, but you can double-click and double-click and you get to your actual raw data items. So, you go from ESG to environmental social governance, you go to what we call twenty-six drivers of ESG performance, and then you get to four hundred and fifty ESG raw data points. And that’s, I think, what most investors really appreciate. You’re not stuck with something that is hard to explain, hard to understand, and you always get into discussions: “Is this now greenwashing?” or “Is it real?” You actually see the carbon emissions, the number of women on the board, the human rights profile of your portfolio, and you can double-click in the underlying drivers. And that’s the beauty of ESG Book, and modern technology makes it possible. Because you can put it on the cloud; you make it available for everyone. It’s a resource that is free and everybody can sign up to it.
Prickett: Great, so you’re opening up the black box that many have complained about in terms of ESG ratings. You know, Daniel, one thing that struck me when I saw the announcement of ESG Book was that you were partnering not only with private financial institutions but with some public agencies, like the World Bank’s International Finance Corporation. At WEC, our mission is to advance sustainable development through corporate business practices. So, we’re very mindful of the global development picture. Tell us why you partnered with public agencies, in what would seem to be of, kind of a strictly commercial undertaking. What’s going on there?
Klier: Yeah, brilliant. I have to give a lot of the credit of ESG Book to the World Bank and the IFC. They were really sort of the core, founding fathers of the platform. And, why? Because if you’re the World Bank or the IFC, your main exposure sits in emerging markets. You give money to companies in the emerging markets. And frankly, if you look at ESG information and even the awareness for these topics in emerging markets, it is quite limited. You also see a very significant correlation between ESG ratings and the state of development of a nation. And sometimes that is driven by companies in more developed markets just pay more attention to this, but frankly, often though, it’s just companies in more developed markets do better disclosure, provide more information. And so, if you’re the World Bank, your main worry actually is that with ESG integration, if we don’t do it well, capital moves away from emerging markets. Because capital over-indices companies that disclose really good stuff.
And so the idea of ESG Book was initially, “How do I create a platform when companies that currently don’t provide enough information, companies that don’t understand what all the acronyms mean—How do I encourage them, and help them to be part of the international financial system? And therefore, attract money probably in the geographies that need it most.” So that whole history that was the original spirit of ESG Book, we then meet as a much broader initiative with about twenty-five very large institutions, the United Nations, Swiss Re, HSBC, Bridgewater. They all came together to create this, but all the credit goes really to the World Bank.
Prickett: I love that. Democratizing ESG investing and making it more accessible to companies in emerging markets which is where a lot of the effort is going to be needed in the future. So, let’s talk a little about where this sits within Arabesque’s business. As I understand Arabesque’s business model, you both provide data, freely and publicly, but you also do your own proprietary analysis for paying customers. If I’m a user of ESG Book, how can I be confident that this isn’t skewed to benefit your own advisory business? And vice versa. If I’m a customer of your advisory business, why are you better than others in terms of having ESG Book at your disposal?
Klier: So, the reason why we’re pushing ESG Book as a free resource of ESG data, is because we have the very strong belief that at the moment everybody argues that there isn’t enough ESG data, very soon, we’ll be in a world where people have too much data. ESG data essentially is any non-financial data. It’s what’s in the news, in social media, in NGO datas, in satellite information, and what companies disclose themselves. And so the challenge that we see, is that most investors, but also companies that want to understand their supply chains actually face the problem, there’s way too much information. You can drown yourself in data, and you’ll still have no idea of what you’re looking at. And so our philosophy is, you make the data available for free, but commercialize the analytics that you put on top of data. So, in sort of our technology analogy mindset, we wanted to create a Spotify of ESG data. Why? The music is free, but if you want to create your own playlist, then we would like to have a contribution. But the idea is that the data should be free, because that’s the only way to create transparency, to create trust in this whole ESG topic, and we will help people that make the right investment choices.
Prickett: Very good, very good. So, Daniel, I have one more question for you, and that’s to, you know, put on your futurist glasses and tell us, this ESG investing movement came very quickly to the mainstream; it’s very dynamic. Where do you see it heading? And what does the world of ESG investing look like five years from now?
Klier: Yeah, for me there are two very important trends. The first one is we’re moving from what I would call ESG 1.0 to ESG 2.0. We spent the last five to ten years in building awareness for the importance of environmental, social and governance issues, but we put it in as sort of one umbrella of ESG, alright. So, a lot of people have launched products, have launched commitments, that essentially brand everything ESG. As we mentioned a little bit before, I think that next phase is a lot more nuanced because what investors really want is understand this: “Is my portfolio actually aligned with net zero? How is the diversity and inclusion policy across my portfolios? What’s my exposure to human rights? And so, I think we see a lot more themetatic fragmentation of the topic, which makes it a lot more relevant to actual investment choices because you can actually relate to each of these topics. I think that’s one big trend.
A second big trend, and that’s true for companies and financial markets is that regulation plays a much bigger role. The increase in regulatory intervention on this topic is very, very significant, both on the side of companies and what kind of information they need to provide. And in terms of financial markets, what is required to integrate ESG information into risk management, into investment choices, into the advisory processes. So, in Europe you now need to evidence that you actually ask your customers how sustainable their portfolio is supposed to be, rather than just ask them for their risk appetite. So, I think it clearly, this is becoming a license to operate. This is no longer a, just positive differentiator; it is also a minimum hurdle you need to jump over.
So, I think the next two to three years will be quite exciting, because it is moving from the few that believed in this early to a topic that everybody has to comply with. And it also moves into an area where I think investments become a lot more emotional, suddenly. Because you can actually put your own values and your own beliefs into a portfolio construction, something that we haven’t seen for a very long time. And I think that’s actually a quite exciting development for the next few years. Companies will need to answer, suddenly, very different questions, right. Because people go beyond traditional financial analysis, there’s an element of climate, and many other non-financial metrics. Your members notice, but this is becoming our global, a global license to operate.
Prickett: Fascinating. It’ll be interesting to see how it plays out in the role technology, and your technology in particular will play. So, Daniel, I’m gonna let you get back to your business at Arabesque S-Ray. Let me add for WEC members, you’ve been invited to a webinar coming up on March 23rd, so that you can dig in a little deeper into ESG Book with Daniel and his colleagues. Later in the year, Arabesque will sponsor a roundtable on ESG investing more generally, where it is today and where it is going. You’ll hear more on that soon. Thank you so much, Daniel, for your time today and for bringing us all ESG Book. We wish you very well.
Klier: Thank you very much.
Prickett: Okay, take care.