David Harris, group head of sustainable business of the London Stock Exchange, spoke to Finextra TV about how he works to integrate sustainable finance across the capabilities of the group by considering the flow of data from issuers through to investors and the capabilities needed to support both and ultimately, the entire market.
Developed long before the term ESG (environmental, social and governance) had been coined, Harris references the 2001 launch of the FTSE4Good Index, a series of ethical investment stock market indices, but explains that while there was very little investor interest, the media was having a field day by calling it a “silly index”, the likes of RBS and Tesco were displeased at not being included and NGOs like Greenpeace were irritated that others had been.
Harris highlights that alongside the formation of the index, FTSE attempted to ensure that the methodology was understood, the criteria was clear, and companies were aware that thresholds would be raised over time which would in turn, inevitably encourage organisations to keep pace with good practice. “If we fast forward to today, the market has changed completely and now, this is the highest priority issue for most of our large investor clients.”
Furthermore, funds that have primarily focused on their active portfolios, are now moving ESG, namely climate risk, into passive areas and increasingly, integrating it within the design of the index. The LSE would overweight or underweight companies according to their climate credentials and position, but as Harris explains, a lot of organisations are simply unaware of the level of change that is occurring in the investment industry.
What global investors need is transparent criteria that can be used as a basis to engage companies in high carbon sectors and collaborating to make changes with an aim of becoming sustainable. However, a problem persists in how data can be shifted to the index so that passive index investors can align their impact investment with the engagement.
In addition to this, another concern about the authenticity of the data permeates and Harris states that there are two types of data: “data that is reported by companies and other unstructured data, from a variety of sources such as regulators, social media or satellite data.” How can we make sense of all these data types?
Harris adds that while the availability and credibility of data is improving over time, when considering unstructured or big data, there is excitement there but there is also often a lack of understanding about where this data is coming from and how to apply it in a sensible way.
Harris concludes with three questions:
• How can we get better, more consistent data globally?
• How do we get investment into green industries?
• How can we help high carbon sector transition?
Watch the full Finextra TV interview here.