Climate Action

Jing Zhang on the importance of ESG data in tackling the climate crisis

Ahead of the Virtual Edition of the Sustainable Investment Forum Europe 2020, a 4-Part Digital Event Series starting from 8 September, we caught up with Jing Zhang at Moody's Analytics to discuss the importance of ESG data in tackling the climate crisis.

  • 25 August 2020
  • Rachel Cooper

Ahead of the Virtual Edition of the Sustainable Investment Forum Europe 2020, a 4-Part Digital Event Series starting from 8 September, we caught up with Jing Zhang at Moody's Analytics, to discuss the importance of ESG data in tackling the climate crisis.

Q. In your opinion can data help to solve the climate crisis? Big data is often heralded as the answer to many problems so why not the climate crisis?

The biggest opportunity to address climate change lies in changing people’s behavior, more than data and analytics, but forward-looking analytics, built on top of large amounts of data, can play a constructive role in solving the climate crisis by helping people changing their behavior. For example, the Institute of Computational Sustainability, representing concerned computer scientists and environmentalists, is developing several models to help increase the efficiency and the effectiveness of how natural resources are managed. In the area that I am directly involved in, experts from climate science, energy system, economics, and finance have been working together to develop a collection of models that quantify the economic impact of climate change granular level. These models' outputs, and the insights they generate, can help institutions and investors manage the financial risk and return trade-offs of various policy options for solving the climate crisis.

Q. How can big data be translated into meaningful ESG information to encourage tangible action and drive successful outcomes?

The key lies in translating the data into meaningful ESG metrics that can provide transparency and influence incentives and financial performance. Suppose we want banks and institutional investors to play an influential role in combating climate change. Detailed disclosure about the carbon footprints of their loans, bonds and other investments is needed. Furthermore, banks and institutional investors need to set binding metrics and targets for reducing the carbon footprint of their portfolio that can ultimately influence their customers' behavior in the real economy to cut emissions.

Q. Do you think that gaps in ESG reporting should be filled by regulation?

Significant challenges in ESG reporting today hamper its usefulness. These challenges need to be addressed either by more concerted industry efforts or by regulation. Take the Task Force on Climate-related Financial Disclosures (TCFD) as an example. Leveraging artificial intelligence algorithms, we recently conducted an extensive study to identify and collect climate-related reports published by corporations worldwide addressing TCFD recommendations. The effort yielded one of the largest digitized, searchable repositories of TCFD-related disclosures to date. Analyzing this large dataset with natural language processing techniques, we found that despite significant improvements, disclosures still lack consistency and comparability.

Q. Why is the disclosure of ESG metrics lagging so far behind financial metrics for many companies?

There are several factors. First, the disclosure of ESG metrics is a much more recent development. Developing ESG metrics that are objective, meaningful, observable and measurable is quite difficult. The lack of common and standard ESG metrics, either by industry efforts or by regulation, is another major factor. Finally, not all companies, or their stakeholders, have yet been convinced that the disclosure of ESG metrics is needed or useful.

Q. What can investors learn from the COVID -19 crisis?

In the context of ESG, there are several important lessons. The most significant is that pending crises forewarned by scientists can no longer be ignored and the time to act is now. Obviously, the climate crisis is the biggest example. If investors want to understand the economic damage that climate change will cause, they can look at the COVID-19 pandemic and its consequences. The loss of life and economic pain is on a level that could happen regularly if we do not solve climate change. Another lesson is that solving an epic crisis such as a global pandemic or the climate crisis, calls for a global and coordinated response, and change of behavior on a massive scale. The magnitude of the subsequent economic and financial impact is highly dependent on the success of our collective actions. From a risk management perspective, the COVID-19 crisis further underscores the importance and usefulness of multi-disciplinary scenario design and planning.

Moody's are a sponsor of the Virtual Edition of the Sustainable Investment Forum Europe 2020, organised in Partnership with UNEP-FI. The 4-Part Digital Event Series will take place on the 8th, 11th, 15th and 22nd September 2020. Secure your place today by registering for free here.