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Data on the Data

Episode 11: The asset allocation into the green economy

In this week’s episode of Data on the Data, David Harris, Global Head of Sustainable Finance, Data & Analytics, London Stock Exchange Group, outlines the huge momentum which is now driving investments into the green economy. Leading this change is the ongoing development of criteria that are helping define many aspects of sustainable finance. Investors need to follow the flows to maximize the opportunity. COP26, which takes place in November, will be a key event on the timeline of transition.

  • Roger [00:00:06] Over the last 12 months, investment in green technology has absolutely taken off, and no investor should ignore these trends. Asset owners themselves are directing a tide of capital into these themes. And for investors, understanding how these themes are going to evolve will be absolutely key. David Harris of the London Stock Exchange Group outlines some of the developments that will help to define these trends.

    David [00:00:31] There is a huge level of momentum now around climate and taking action on climate across the investment community. This has been very much driven by pension funds, by the asset owners. If you look at some of the biggest initiatives, like for example Climate Action 100+, if you add up the assets under management of all of the members of CA100+, it's over 50 trillion. So this includes the largest asset owner in the world GPIF, it includes the largest asset manager, BlackRock, there are many others besides. And so, and the rationale for this to be very clear, this is investment-driven. There is a realisation that climate change is causing disruption and huge levels of change across different sectors of the economy. We've seen it the impact here across the automotive sector, across the energy sector, causing huge and fundamental shifts in the makeup of those industries. And we're going to be seeing the same effect across a whole variety of different industries over the head, over the years ahead, and investors are getting ready for that. The shift to a green economy isn't some theoretical thing in the future, it's happening today. In fact, it's been happening over a number of years. I think this chart is really powerful and it shows you just the growth of green economy industries over the last 15 years or so. And it contrasts that with the performance of broader equity markets, which, as you can see, the substantial outperformance vs. the fossil fuel economy here represented by the oil and gas industry. So it's very stark when you look at it. This is, there's a huge amount of assets flowing into green industries and companies in higher carbon sectors are needing to transition.

    David [00:02:40] COP26 is fundamentally important. COP21 was the Paris Agreement, so you might remember that it took place just over five years ago. This is the next big climate summit, and this is the focus for this one is all about trajectory to net-zero emissions. And so we're seeing commitments from governments around that, we're also seeing commitments from businesses, but also investors, asset owners, asset managers, banks and the insurance sector. So industry is moving, setting long term targets, but also working out how are they going to get, be getting there by setting interim targets, too, not just in terms of their operations, but for the investment and finance sector about the emissions associated with their investments and their financing.

    David [00:03:35] To achieve net-zero, we need data. Investors in the finance sector need high quality, reliable, consistent climate data, and at the moment that's a real challenge. Now LSEG sits in a really interesting position. We sit between investors and the finance sector across the real economy, corporate issuers with different parts of our business, and we're able to help try and join a lot of this up. So LSEG actually made its own net-zero commitment, and we committed to reducing our own emissions by 2050. And we've set a variety of targets about how we achieve that, 2025 and 2030 through not just our energy usage, but through our suppliers, through our through reducing our travel, etc.. But and that's what every company is doing. The really interesting thing that we can help is how do we help drive global decarbonisation? And we can do that through three, three different areas. One is around how do we help drive better data and disclosure, as I was just talking about? A second area is how can we help support the growth of the green economy? And the third area is around supporting the transition of higher carbon sectors? A really actually a whole economy, the whole economy, decarbonisation and facilitating the data flows to enable all of that, facilitating the capital flows to be able to support all of that. And I guess we also have a role around how we convene across all of these areas.

    David [00:05:14] To get that data, we need high-quality levels of disclosure from corporates, from the real economy, companies need to be able to better provide data in a really consistent way. There is a very clear standard around this, TCFD - that stands for the Task Force on Climate Related Financial Disclosure, it was a task force of the Financial Stability Board. They've come up with a set of ways of reporting on climate, and an initiative which David Schwimmer the LSEG Chief Executive kicked off with Mark Carney, was we wrote to all of the exchanges around the world, said, let's work together, come up with a consistent guidance on climate reporting. We've been working through a coalition of exchanges and actually on the twenty-ninth of June we will be launching the Model Climate Guidance developed by exchanges for exchanges, based on global standards on climate reporting. That's going live on the twenty-ninth of June. We want all exchanges to be getting out their guidance based on that between now and COP26, which is taking place in November in Glasgow. And we think that's going to help provide a consistency of data, get the data out globally. There are other initiatives going on which are going to be really important here. We're seeing it being brought into regulations in the UK, in New Zealand. We're also seeing IFRS that's the International Financial Reporting Standards body, starting to get this also formulated through a Sustainability Standards Board. So there's a lot going on on disclosure. We think exchanges can really help accelerate that. So of trying to play our role within driving that better climate data and disclosure.

    David [00:06:59] This is an area which is also evolving very quickly, there's a range of different taxonomies which are being developed by different markets. The EU is probably most advanced on this, but China has got their one. The UK is setting up, setting up a process to develop its one, the ASEAN markets are coming up with a classification system. So is Canada, but what we're really needing again is consistency here. So what we're needing to try and do is get a good data on the revenues that companies are deriving from green products and services. And we've been developing a classification system, the Green Revenues classification system that can sit above and provide a bit of a language across all of these taxonomies, and is a way then to be able to measure the level of green exposure at a portfolio level so it can also be used for reporting against these taxonomies. But it can also be used as a way to provide a kind of clarity on which companies are really involved here. So London Stock Exchange has taken that data, created a Green Economy Mark for companies which have more than 50 percent of their revenues from green industries. So there's a number of Green Economy Mark companies now listed in London. But this data is also being used by asset owners and asset managers to understand their exposure to the green economy and trying to increase it over time. But we need to see those capital flows into green industries to help the scaling up of those sectors.

    [00:08:34] Climate change is going to impact every sector of the economy, and for high carbon companies, companies operating in sectors such as oil, gas, coal, as well as like auto sector, steel, chemicals across a whole variety of sectors which are more carbon intense, those sectors are going to have to change quite radically.

    [00:09:04] What investors are looking for are credible climate transition plans from those, from those companies. And I think that some investors are divesting but what many are wanting to do is stay invested in these sectors, but look to work with those companies and help encourage them to come up with with credible plans. Now, a key way of doing that is these two interconnected initiatives. One is Climate Action 100+, which I mentioned earlier on, and the other is the Transition Pathway Initiative, which provides a lot of data that goes into Climate Action 100+. The concept here is that companies are being assessed in a very consistent way on their climate strategies, and they're scored on it. So they get a score in terms of their management quality and then they get a score in terms of their their carbon performance. That provides a common basis where each investor can then engage with companies encouraging them to improve their practises. What we're also doing is building that data into indexes and into benchmarks. So FTSE Russell has created a variety of climate adjusted indexes where company weights in the index are overweighted or underweighted in relation to whether or not, to the scores they're getting, so that as companies improve their weight in those indexes and their weights within the passive index funds that follow them go up. So companies with more credible transition plans see greater investment flows coming into them. Companies who don't have good transition plans potentially are going to see a lot of investment and finance moving away from them. So this is, there's a lot happening here.

    David [00:10:50] There's a series of events which we are co-organising with the Principles for Responsible Investment, so LSEG PRI Cop26 Investor Action on Climate Series, we've got the next of those is coming up very shortly actually, on the twenty-ninth of June, there'll be another one taking place in October, just ahead of COP26. Those are great ways to get informed with what is what is happening. We will be unpacking a lot of that within those sessions. So look out for that. There's also a lot of information also available on the Refinitiv and and LSEG websites, keep an eye out for those. And there is the COP26 champions team who are also bringing much of this together, so there's a range of sources.

    Roger [00:11:36] Momentum within this space is continuing to build and global stock exchanges are collaborating in order to standardise the criteria for companies and investors. Asset allocators will need to monitor and then follow these evolving trends, and that analysis needs data. Sitting between the investors and the corporates, London Stock Exchange Group and Refinitiv are extremely well positioned to provide all the data and analytical tools for that process.