In his FinextraTV predictions interview for 2021, David Harris, group head of sustainable business at London Stock Exchange Group, speaks to how the year is likely to see sizeable progress around sustainability.
Harris believes that the momentum around sustainable finance has dramatically accelerated throughout the Covid-19 pandemic, and that under the progressive actions being signalled by the White House’s Biden Administration, we can expect even more acceleration of these trends.
“If we look at asset owners - the pension funds - that have driven so much of the growth in this space, in the US we’ve seen a drive from the public funds particularly on the East and West coasts, whereas in the corporate funds, there hasn’t really been action at all.”
Referring to an LSEG survey carried out during 2020, Harris notes that the global average for asset owners who were integrating ESG into their smart beta index funds was just over 58%. Breaking this down further, he notes that for Europe this was over 91%, while the US was only just over 40%.
Harris expects that there will be changes in the “mood music” in the US Department of Labor, prompting wider adoption and many more US asset owners coming to the ESG table.
“The US being engaged on sustainable finance and investment and all of its underlying themes is going to cause an acceleration across a whole series of areas.”
Interviewer Richard Peers proceeds by questioning Harris on how COP26 will play a role during the sustainable finance push of 2021. He responds that the fact that the summit had to be postponed to November this year has provided an opportunity to build even more momentum around the cause.
“Paris was all about hitting the goal of reducing average warming by two degrees, ideally one and a half, but this time the focus is solely on net-zero plans, not just for governments, but for companies and investors as well. With the US coming back to the table and re-signing the Paris Agreement, I think we’re going to see a huge focus here.”
The interconnection between investors and companies is going to be a key theme of the summit, with Harris adding that the big initiative at COP26 is Climate Action 100+ (CA100+) that brings together the largest investors to align their engagement with companies on climate.
The Transition Pathway Initiative (TPI) forms the core part of the data for CA100+ and the LSEG is looking how it can bring TPI into index designs.
“We’re also bringing TPI into established indexes such as FTSE4Good, and just a couple of days ago we announced that we’re going to ramp up the thresholds on FTSE4Good, while also aligning the climate methodology with TPI. The market is frustrated with all of the standards and methodologies, so we need to try and bring those together.”
On regulatory standards, Harris elaborates that many players in the industry have been calling on the International Organisation of Securities Commissions (IOSCO) to try and prevent regional fragmentation of standards across different markets, and development is now coming to pass.
On top of this, the International Financial Reporting Standards Foundation (IFRS) is looking to establish their sustainability standards board, while the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) have integrated and devising a potential climate protocol which links in with the Task Force on Climate-related Financial Disclosures (TCFD).
“What we’re seeing is these frameworks finally starting to come together and getting some kind of global standardisation…this is potentially a really important year for bringing these standards together.”
Interlinked across these issues are taxonomies. There are many taxonomies being developed around the globe, and for LSEG, the regulation factor is central. The Group has its Green Revenues 2.0 data model looking at thousands of companies and breaking down their revenue by various green sectors and subsectors.
“Investors are going to need to start to report on what proportion of their portfolios are aligned with the EU taxonomy. We’re expecting a lot of usage for this kind of data not only for direct investment purposes, but also for regulatory reporting.”
He adds that there are many other varieties of data which should be used as a supplement to corporate data, such as big data, AI, satellite data, sentiment data, but the challenge is ensuring that the information pulled from this data is robust and transparent.
“We’re already seeing huge innovation in data, and while “we’ve seen incredible developments during 2020, 2021 is going to go even faster.”
Standards, taxonomies and regulation for climate action will be explored in depth throughout Finextra upcoming event, Sustainable Finance.Live, from 11th-12th May. You can find out more and register here.