Episode Transcript
[00:00:09] Speaker A: Today, we welcome to the John Lothian news ESG podcast, Randall Hopkins, who leads Nasdaq's ESG solutions. Welcome to our podcast, Randall.
[00:00:23] Speaker B: So great to be here. Thank you for the opportunity.
[00:00:25] Speaker A: Yeah. So I'd just like to have a conversation with you about Nasdaq and what it sees as its role in ESG. I understand you have an entire business dedicated to that.
[00:00:40] Speaker B: It's been an amazing growth story for us. We had started, of course, providing a lot of technology solutions to our corporate clients in their work connecting with investors, especially, and in their work being good public companies in the capital markets. And over time, it really became clear by the inbound questions that we were getting that ESG was a larger and larger percentage of the conversation for the stakeholders that they were addressing, both investors and non investors. And so we sort of see ourselves in this really unique position, this nexus of investors on the one hand, and corporations on the other, and regulators on a third, and all the raiders and the rankers that are doing their work around ESG. And it was really an opportunity for us to think carefully about how we can really drive value through the stakeholder ecosystem. And those corporations that were coming looking for help on ESG were good partners many years. Maybe they'd been listed with Nasdaq for decades, or they'd been using our other software solutions. So we thought, well, let's go ahead and really invest. And so we thought about it in two ways. One is, how do we help companies prioritize some of the work that might be brand new for them, or maybe they have done some initial work and need to decide what next steps to take. And then on the other hand, once you're in the operational aspect of it, how do you do the best work you can? How do you be the best version of yourself? And that became a real investment in the software side of things, helping companies manage the multiple data sources that contain ESG data, and how do they communicate that effectively out to all the third parties, the raiders, rankers, investors, all of that. So as we think about our role sort of sitting at that nexus, we really try to take a step back every time we can to make sure that we're driving value throughout the system.
[00:02:51] Speaker A: I think I saw on your website something that looked like an ecosystem map. Were you instrumental in developing that?
[00:02:59] Speaker B: Yeah, I'd say we took the pen. The ecosystem is, we think a lot about systems, systems design, systems efficacy in terms of how we really focus on creating an environment where the stakeholders can value and benefit from capital markets, the investments, the jobs, that get created, the sort of innovations that come from the markets. And so when we think about sort of drawing that topography, if you will, all the different spots in that map and that ecosystem, we really think a lot about how to create systems that are transparent and in the case of markets that are liquid and that really have the integrity that needs to happen in order for systems to be trusted to be effective in terms of creating those positive outcomes for stakeholders.
[00:04:05] Speaker A: Sustainability is not even quite fully defined right now. So you're working in a world that's learning how to talk about itself in a way.
[00:04:17] Speaker B: Yeah. No, really well put. I think our heritage, of course, being in technology works to our advantage here. But I also think we benefit from a lot of the relationships we have with the 10,000 corporates that we serve and the tens of thousands of investors that we serve around.
Where are the places where technology can really help and can drive scale and drive impact. And as you say, the industry is still quite nascent. And at the same time, we've been doing this for many decades now, actually with our technology. One report, technology started in 2003, and Metria more recent than that, a little bit. But we've had so many great customer engagements to help inform our use of technology. And if we think about the current state of play and how many different systems are tied in that are collecting this ESG data and then ultimately need to be connected to create either sustainability reports or disclosures to a framework or a regulator, that technology is there, it's present. The question is, how do we harness it to the best of our capabilities as practitioners? And while you're 100% correct that the industry is still the term sustainability means different things to different people, the importance of bringing technology to scale, that work to create greater impact, is critical because we're all doing so many different things in the sustainability space. I was at an event recently where we went around the room and talked about the biggest challenge that we had in our sustainability programs. It was interesting. We had a dozen or so folks in the room for breakfast, and they all had very different answers in terms of their biggest challenge. So I think if we can bring technology to lower the hurdle rate on companies, on those challenges by creating more homogenization in the technology, in the ones and zeros, as we say, then we can really be more effective in impact and create better outcomes for companies and for investors and throughout the ecosystem. So I'm really excited about the role technology can play. And at the same time, I think we're at a stage in the industry where we still do really value human insights. We have 160 sustainability and ESG professionals on the team that are providing those valuable insights. The prioritization, the perspective of what others have tried and been successful at, in some cases tried and wish they hadn't. A lot of those insights, I think, are really valuable. And technology plus humans, I think, is really where state of the art is, and I think really excited that we've got a great vantage, as you say, from where we sit to be able to provide that.
[00:07:37] Speaker A: I think when COP 27 was opening up, I think there was a headline that ran in the Financial Times that said something like, ESG will not happen without AI. Shortly after that, it sounded like the major players in the AI world just kind of retracted for a while, because clearly AI can play an incredibly important role in taking on what sometimes feels like an impossible task. So how do you see it playing out?
[00:08:13] Speaker B: Early returns on AI have been focusing a lot on benchmarking, I think, for all the right reasons. Where AI really has tremendous value and potential is in taking enormous data sets and distilling them, getting good directional information, really having high quality benchmark and sort of framing data for audiences. In this case, we do a lot of our work around providing benchmarks and that kind of understanding where a company is in relation to their peers and how they're sort of thinking about the ways to maybe be more aspirational. What companies or what thresholds might I be able to meet next year that are even greater than this year? I would also say that it's not a panacea for doing the really thoughtful, careful, highly precise work that we need to do in the industry as well. And I see that that's another trend that we observe, is that the companies that have maybe said, I'm just going to AI this thing, or I'm just going to Chat GPT this thing. I think what they discover is that there's an awful lot more to it than that, because for one thing, as we look across our 10,000 corporates, one size doesn't fit all in anything, let alone ESG or sustainability. So I think there is a huge value in taking advantage of AI for the parts of ESG that are subject to that kind of value creation. And at the same time, I think it's very important we have an ESG advisory practice, for example, that really focuses on those individual insights that you get from rolling up your sleeves and really understanding the nuances of a business and where the levers are that can be pulled which AI isn't scaled to do. But what we see really good success on is the benchmarking and also the sort of tracking against goals. So most companies are either already or thinking about either setting science based targets or goals. And I think it's really cool to think about the ways that AI and some of the additional technologies that are coming online can be used to track those progress points. As companies continue to go down their path.
[00:10:48] Speaker A: What do you see coming in that you find to be exciting?
[00:10:52] Speaker B: One thing that's really encouraging to me is that a lot of the companies with whom we're working are really organizing thoughtfully around this important work. I mean, the ESG practice is really a microcosm of the broader business practice, right? So we have, so much of this work is cross silo. It's across departments and units and business areas. And so what's really exciting to see in the development of this industry is that companies are starting to think about, well, how do we do organizational design around ESG, which in itself is a big thing and it doesn't belong in one department. So therefore, how do we make good decisions? How do we think about committee structure, how do we think about the frequency of our connection points? And frankly, how do we collaborate? Because so much of this work is collaboration. It's interesting because in our ESG software, it's a workflow tool that helps companies collect the data and ultimately disclose the data. But what's interesting to reflect on is that it has become the hub, the sort of the community, the connection point for different departments to come together to talk about these important topics. And so if, for example, you have, let's say, a sustainability lead that would like to say, let's set a target of 5% reduction by this time next year, the facilities person is in the mix in the conversation can address directly a proposal that scope two be reduced by 5% by next year. And so now, all of a sudden, you have a forum for that conversation. And of course, you have the head of marketing, who's in that conversation as well, and you have the head of legal who's in that conversation as well. So you have eight or ten or 20 or 30 people that are in that really important conversation about how to set goals, how to make progress, how to achieve them in different ways, shapes and forms. And of course, we talked about technology earlier on, having the ability to have a dashboard that you can see how you're doing against those, and you can again have that conversation, pardon me, facilities manager, I think you were going to commit to this by February, and I don't think we're there yet.
How are we going to correct for that? So this community, this collaborative space toward these sustainability goals, I think is really empowering. And I think it's really the wave of the future, if you will, in the sense that this is not a one person job, this is a team sport.
[00:13:47] Speaker A: There are stories in that data that you can read, understand and use for bringing about progress and change in your organization. Can you share an example, a success story?
[00:14:03] Speaker B: I think a lot of the success stories probably start from that original statement that we'd all make about sort of who is our audience, right? So we think about the ESG and the sustainability journey being a single track, but in many cases there are multiple tracks, right. We have stakeholders in our employees or our customers or supply chain or sometimes our prospects.
We have, obviously, the planet itself and our progress to achieve goals there. And so all of the different stakeholders have different success metrics, or KPIs, that companies put forward. So I maybe just tell two quick stories, one around ratings and rankings. So one of the benefits that companies find in doing more robust disclosures is that they get included in other indices that expose them to new investment dollars and ultimately decrease the cost of capital. So we were talking about removing sand from the gears earlier on, and one company that we had been working with was looking to make another disclosure, a new disclosure, a year back. And they were frustrated by the size of the questionnaire that they had to complete in order to be eligible to be included in this index. And so they used the sort of the scalability of our software, particularly the fact that we had deduplicated all of the questions and had cross referenced all the questions between the different frameworks.
[00:15:45] Speaker A: How many questions are we talking about here?
[00:15:48] Speaker B: So, in our database, we have about 5000 questions that are sort of in play. Not 5000 for any given company, of course, but we track and manage and update and collate and provide guidance notes for, obviously the biggest and the most widely used. And so it's a large database. But the happy news is that we demystify it and make it a lot less scary for any company. You're probably looking at several hundred, though, so that can be an onerous task in some cases, several hundred questions. And so by our deduplicating them and providing guidance notes, they were able to efficiently get their response submitted, in this case to S. P, and be included in the Dow Jones Sustainability index for the first time. And it was a big win for them publicly, for their executive leadership team, for their board, and ultimately for their investors, because it decreased the cost of capital for the company. And that was a great example of how to reduce sort of the hurdle rate, if you will, of this work and be able to provide more disclosure and create greater impact for all their stakeholders. So that's one sort of finance angle. The other one that I would share is interesting to me because it's not a story that gets told very often, but we have a large number of our corporates are b to b, and they see a lot of RFP responses coming that they have to supply answers to, right? So they have a department that is dedicated to writing RFP responses. And a lot of the new business that they were seeking, this company was seeking was, please provide information about your sustainability report or more information on your goals. Are you going to set science based targets next year, et cetera. And what was interesting about this firm is that they made the commitment to do this work because they wanted to generate more sales, which isn't oftentimes the way that it's, unless you're in a consumer facing space. It's not the common rationale for companies beginning this work. But the good story there was that when they started viewing this as an opportunity to create more affinity to their prospects, they were able to scale the ESG data inside their software and to provide more homogeneous answers, but also ones that were more likely to win business. So they derisked by having the same answer for all their prospects. That was good for the lawyers and for the chief revenue officer, it was great because they got a chance to increase their win rate. Every customer probably has their own story as to where they're getting the highest yield on this activity.
[00:19:06] Speaker A: What would you say is the most common thing that folks are corporates are seeking when they come to you?
[00:19:13] Speaker B: There's not an easy answer to that because, no, at this point, the industry is such that there's not a lot of homogeneity.
I would say, if you had a big bucket. The big bucket is data management. Like, help me, I'm three years into this program. I'm starting to feel the real pain of not having enough resources to do the work. I'm starting to worry that I'm creating risk or not taking full advantage of the opportunity. Can you help me with my data problem so that I can get there? And that can take two forms, that can take an operational data form or it can take a calculation data form. So in our advisory group, we get a lot of inquiries inbound saying, hey, can you help me calculate my GHG footprint? Because I know I'm going to have to start disclosing that to my board next year. Can you help me? And so that's a data collection and a data management problem. And then you have the other companion part of how can I just collect all the data that's in disparate systems inside my enterprise? How can I help that get collected and assembled in a way that I can effectively generate a sustainability report or a tear sheet or an investor deck or these kinds of outputs that are very important and sometimes really challenging to find the time to create. So creating scale around those kind of asks is a data challenge for corporations. And as I had mentioned along the way, given our technology heritage, was a great place for us to lean in and say, look, we know a lot about these kinds of problems. We've solved them for ourselves as a public company, and we're happy know scale that and share that back to the community.
[00:21:11] Speaker A: Well, that's really interesting. To think that Nasdaq as an entity on its own, is tackling these same challenges and then passing on its learnings to others. It's good. What do you see coming up in the next couple of months at COP 28? What do you think about regulation? Do you have any thoughts about any.
[00:21:29] Speaker B: Of that on the regulation side?
Most of our business really has viewed regulation as one of many reasons to do this important work. I think that we were talking about technology a little bit ago. I do get the question a lot. When and if there is regulation, won't there be just one framework or one taxonomy to rule them all? And if we can move to a more consolidated environment through regulation, won't that be the simplification catalyst that we're looking for? And I would say we have actually a lot of data on that already.
The answer is no. We actually have had a lot of trend lines in terms of consolidation. We've seen frameworks consolidate and set up affinities or alliances, and that's been great. But at exact same time, we've seen a proliferation of other frameworks, questionnaires, raiders, that are subject matter specific or that are industry specific, or that are set out to answer very specific questions. So what we see is actually a blend right now, and we see that exactly playing out in that way on the regulatory side, because we have regulatory moves pending both on the US side and the european side. And I would say we're seeing a lot of interest in that. And yet it's a small part of the total reason for doing this work. In terms of stakeholder engagement, we obviously want to be recognizing our regulators as one of our stakeholders, but our customers and our employees and our supply chain and our board, all of them, are very much in the game, too. And they wouldn't want us to be viewed as inferior or less than the regulators. And I would say maybe a corollary to that is around sort of how we think about technology.
And that is that we do see the march of technology being very inspiring here and continuing to find ways to, again, take sand out of the gears while at the same time taking advantage of all of the expertise that the sustainability professionals have assembled over the decades. And that's not trivial. It's very relevant to this work. And I do implore all of my team to make sure that we don't see one to the neglect of the other. We really need to use both for this point in time of the industry and make sure that we have scale in our technology and the insights to create the right decision matrix for our teams and our customers.
[00:24:26] Speaker A: If you were a young person getting started these days and you wanted to go work for Nasdaq in your ESG world, what would you study? What would be your world of research and study preparation?
[00:24:43] Speaker B: Yeah, that's a great question. So we certainly appreciate the environmental science students that come in.
They have a lot of perspective on the impact aspect, especially on the east side. I would say a lot of the business school students are able to take sustainability track work as well. And we've seen a lot of great success there in terms of sort of intersection and alignment between the work that we're doing and that practice. But I would say also in the same breath that people that are really nimble of mind, who have the ability to really connect the systems thinking that is involved in the complexities of the business world and the sustainability world, they can come from any discipline. If they have that sort of critical thinking and that sort of curiosity, I certainly think they'll do well in this space because it is a highly evolving space. It's one that has a lot of yield for hard work and creative approaches to really complex challenges in our ecosystems. And certainly for Nasdaq, when we think about our role at that intersection and the nexus of all of the vectors like investors and corporates and regulators and raiders and rankers, there's lots of pushes and pulls in that. And so those that come in who have that creative thinking and sort of careful, thoughtful approach to problem solving, I think do well.
[00:26:26] Speaker A: Thank you so much for your time, and thank you so much for sharing what you're working on. And it's very informative, and I learned a lot.
[00:26:34] Speaker B: Well, really appreciate the opportunity to be with you here today, and it's been great. Hope we can continue the conversation as we go.
