ESG Investing and Sustainable Finance Podcast
Refinitiv Sustainability Perspectives
Explore bi-monthly episodes where we feature the key industry leaders sharing insights about sustainable business, responsible finance, and green economy. Available in audio, text, and video formats.
Episode 4: The journey to Net Zero with the City of London Lord Mayor
Published on: May 17, 2022 • Duration:27 minutes
Recorded on location at the historic Mansion House in the City of London, the 693rd Lord Mayor London, Vincent Keaveny, spoke in person to our host Keesa Schreane ahead of the Net Zero Delivery Summit, that was supported by London Stock Exchange Group (LSEG), which took place at the halfway milestone between COP26 in Glasgow and COP27 in Sharm El-Sheikh.
In our exclusive interview, the Lord Mayor talked to us about the City of London Corporation's own climate action strategy, which has the goals of becoming net zero by 2027, and how they are trying to bring those businesses housed in the Square Mile with them. He also discussed the role of government and multilateral development banks in influencing business leaders to just transition, as well as what needs to be accomplished between now and COP27 to meet the long-terms goals.
We’re excited to debut a new segment on the show called the Green Room, where we dive into the latest research in Sustainable Investing, hearing from experts across the London Stock Exchange Group. Today, we chat to John Simmons from FTSE Russell who has just written a new paper on Carbon Emissions. https://www.ftserussell.com/research/mind-gaps-clarifying-corporate-carbon
Host: Keesa Schreane
Keesa: [00:00:08] Welcome to the Refinitiv Sustainability Perspectives podcast. I'm Keesa Schreane. We have an exciting episode in store for you today. We're excited to debut a new segment on the show called ‘The Green Room’, where we dove into the latest research in sustainable investing. Hearing from experts across the London Stock Exchange Group. Today we chat with John Simmons from FTSE Russell, who has just written a new paper on carbon emissions. But first, we turn to a very special interview. I had the opportunity to sit down with the Lord Mayor of the City of London Corporation at the historic Mansion House just down the street from the London Stock Exchange Group. We spoke just ahead of the Net Zero delivery summit to discuss the road to COP 27, the role the City of London plays in achieving a just transition to net zero, and his views on what's needed to mobilize the capital needed in that transition.
Keesa: [00:01:10] Lord Mayor, thank you so much for joining us.
Lord Mayor: [00:01:11] Great. Fantastic to be on the podcast.
Keesa: [00:01:14] Absolutely. So, the City of London Corporation is around 1000 years old. Wow! That's just amazing. For any of our audience, that may not be as familiar, could you let us know a bit about this organization and specifically your role as the 693rd Mayor?
Lord Mayor: [00:01:32] That's right. It's a number that's sort of almost sort of scares me at times. 693rd Lord Mayor of London. The corporation is, as you say, a thousand years old, possibly even older. It's the longest continuously operating municipal government in the world. And it still does that. It still looks after the City of London, the square mile at the heart of Greater London, a city within a city. But of course, over the centuries, the role of Lord Mayor has expanded. So, I'm not only the civic head of the City of London Corporation, but I'm an ambassador for the UK's financial and professional services sector and indeed increasingly our tech sector as well. So in a typical year as Lord Mayor, I would spend maybe 80, 90 days traveling the world talking about our fantastic financial and professional services here in the UK, bringing business delegations with me, talking about the issues that are really important and really current, because all that history is wonderful, but it's a platform and we've got to use the platform not to look backwards, but to look forwards, to think about the challenges that are around us in the world today. And even more, more importantly, the challenges of tomorrow, next year and the decades ahead.
Keesa: [00:02:38] And I think that's a great segue, those challenges that we're seeing now, as well as what we're going to see into the future and how financial services might be able to support solutions. And before turning to the wider issues on climate specifically and the role of financial markets and all this, I want to start with your own track record. So, what you are doing and accomplishing right now, a series of public climate commitments to reduce emissions to net zero by 2040. And then there are those near-term targets of 2027. So, talk a bit about the process and how you see the steps moving forward, evolving.
Lord Mayor: [00:03:14] Well, this is the City of London Corporation's own climate action strategy, which we adopted a couple of years ago, now with some very clear goals, first of all, to be net zero in terms of our own operations by 2027. And we're on track to achieve that. So, we're looking at all of this, the range of things that we're responsible for, looking at how we make those net zero. And there's a lot of thought being put into that. It was a funded, costed strategy. And as I say, we're confident that we're going to deliver on that target by 2027, but we're looking more widely and actually thinking about what's described as our scope three emissions, looking at our investments and all of those other inputs, our suppliers, all of those other inputs that make up your entire carbon footprint looking to be net zero on that by 2040, which is ten years ahead of the government's target for the UK as a whole. And we're trying to bring the square mile with us so that it's not just the City of London Corporation, but it's all those businesses that are housed here in the Square Mile as well in the City of London as well. We're optimistic. We're pretty optimistic that we'll get there. It's gaining real traction now. I know lots of businesses are thinking about how they will get to net zero themselves in their own operations and in their own wider scope of business. I think we'll get there. I'm pretty optimistic.
Keesa: [00:04:23] So there's a lot to be optimistic about. You know, the UK is really seen as leading the way here and I know we spoke earlier about visiting different countries. So, I'm wondering what are your thoughts on the way forward for developing countries and developing economies? What role do you see the UK is playing? What role do you think developed nations and economies can play to support developing countries as they really move forward in this direction?
Lord Mayor: [00:04:47] Well, this is really at the heart of so much of what we're working on at the moment. I'm just back from Brazil and Chile. Last week I had a series of great meetings in Santiago and then in Sao Paulo and the climate change challenge, net zero and the importance of green and sustainable finance came up in pretty much every single meeting that I had in Brazil and in Chile. So, this is absolutely top of the world agenda. What can we do in terms of London and the UK and as I say, our fantastic financial and professional services sector? Well, we have we have got the expertise, we've got the capital, we've got the money here. We've got to mobilize it. We've got to make sure that it's getting into the developing economies of the world, getting into the global south, helping them solve the problems that they've got. Because if they can't solve the problems, it doesn't matter what we do here, we are still going to have a major issue. We will not have cracked the climate change challenge if we can't get the developing world into a net zero position alongside us as well. So, there's lots of things we can do. As I say, capital, mobilizing their capital getting it in, but also our financial and our legal and professional expertise too. One of the big problems we've got at the moment is there's plenty of capital, there's no shortage of capital looking to go into green, sustainable investable projects. The problem is the projects where they are, how they're structured. We've got to work through this with countries to construct investable propositions around the world so that we can get that capital in and start making a real difference on the ground in countries like Brazil, in areas like the Amazon.
Keesa: [00:06:17] Wow. And when we're talking about what's being done on the ground, the wonderful piece of this is the move toward the just transition. So, making sure that the transition happens, but to make sure that no one is left behind, if you will, in terms of the work that the UK is doing to make sure that training and jobs are really top of mind to ensure that just transition happens. What will you say is some of the most important steps?
Lord Mayor: [00:06:39] The just transition is so important. If we're not going to get this cost benefit allocation right, it's going to be very hard for the developing economies to come along with us. But I point out actually that just transition is not just an international problem, it's a domestic problem as well. If you think about the steps that we've got to take here in the UK economy, we've got to make sure that those who on whom the costs fall are supported through that as well. We have a national just transition challenge ahead of us. But I'm optimistic because you've mentioned some of the things that we can do. We can help through skills and training. We can actually help in that job creation. One of the great things about this green revolution that we're looking at, at the moment that we're experiencing, that we're living through at the moment, is that it's going to create thousands, hundreds of thousands, millions around the world, millions of new jobs. While people think there's a lot of cost associated, yes, there's a lot of costs. But a lot of that cost is in technology, in innovation, in creating new technologies, new energy sources. It's tremendously exciting because with that, they're going to come millions of really high-quality new jobs around the world. So, I think that's part of the just transition, making sure that the skills are there, that those opportunities are being created around the world. But a lot of this comes down to, as I mentioned in answer to the previous question, around creating the right structures so that we're getting the money in to these economies, into these projects in the right way, in a way which is positive and incentivises the sort of the change that's required that isn't actually debt that's going to sit on and strangle that economy for years to come. And it is possible this is all doable.
Keesa: [00:08:17] And let's dig deeper into that, specifically the role of government and the role of policy in terms of nudging, we'll use the word nudging, nudging corporations toward this just transition and nudging corporations toward this net zero goal. How do you see policy and government officials influencing business leaders toward that?
Lord Mayor: [00:08:36] Well, we've actually got an event here. I'm really looking forward to the Net-Zero delivery summit coming up over the next couple of days here in London. It's going to be a really exciting opportunity to bring policymakers to bring the finance world together to talk about how we make some of this happen. There's a lot. It's a complicated picture. The role of the multilateral development banks, for instance, is a critical one that we need to work on over the next few years. We don't have much time. We've got to find out how we can make the multilateral development banks, the DFIs, the Development Finance Institutions, actually to transform, they're going to have to transform the way they do their business. There's huge interest in this. There's a lot of appetite in the finance world to talk about this. We've got to now bring the policymakers and the politicians, because it's the national governments that are the shareholders in these institutions. So, we have got to convince the governments around the world that these institutions need to play a much more engaged, much more positive role alongside private finance in the transition to net zero and that race to net zero. Some of this will be difficult. I'm talking only the other day to a representative of one of the leading UK insurance companies who are saying what they're thinking about is we almost need a new Bretton Woods to talk about re-engineering the financial architecture of the world to facilitate the changes that are required in the transition to net zero. And at the heart of that, I think, are some of these international institutions that are going to have to really rethink the way they do their business.
Keesa: [00:10:01] You frame this as a race and COP 27 is going to be here before you know it. So, with that said, you're doing a lot of advocating on behalf of the City of London, on behalf of the narrative around net zero. What do you think needs to be accomplished between now and COP 27 to really meet some of the long-term goals that you have?
Lord Mayor: [00:10:21] We are almost exactly the halfway point between COP 26 and COP 27 and didn't that six months go very quickly which is of course, is the real issue here. Time is time ticks away very, very, very fast, very quickly. And if we don't get on actually start doing things, we'll find another six months will have gone past another year will have gone past. And actually, we're still talking. So, what the critical thing now is actually to start seeing how we mobilize the capital that's there that GFANZ, Glasgow Financial Alliance for net zero back in November in Glasgow, $130 trillion, 450 financial institutions around the world saying they had this capital available to be deployed over the next over the next decade towards net zero projects. We've got to now start putting down some fairly clear markers in terms of how much when we start seeing that capital flowing. And I think that's really at the heart of the discussions over the next six months to COP 27, if we don't have some clear markers in place, by the time we get to COP 27, I start to get a little bit worried about how much longer we go on talking before we get to actually delivering. One of the reasons we're doing the net zero transition delivery summit and the key is in that third word in the title of this net zero delivery summit, we are looking at how we deliver on this is to come back to that question where we are. We do not have the ability to do a full sort of stocktake of where we are in terms of the delivery since November. But we'll get a fairly clear sense of what's happening, but more particularly where we're going and what we're going to do in the next six months. Running up to COP 27. But we're also already thinking about COP 28 in Abu Dhabi and beyond that as well and beginning to see what are those milestones we've got to have clearly in place between now and each of those events.
Keesa: [00:12:41] So from focusing on the developing economies to focusing on how to bring the corporate sector where they need to be, specifically the financial sector, and also really focusing in on those goals and those milestones. It sounds like there's a lot at work, so congratulations on the great work that you've done already and what you're going to accomplish.
Lord Mayor: [00:12:58] Well, thank you very much. It's so exciting to be involved in this. It really is. And it's wonderful. Last Friday, when I was in Sao Paulo talking to a group involved in finance from various sectors of the finance world, but also involved in agriculture in Brazil, talking about how they are looking to finance small farming enterprises, moving to net zero in the Amazon. And you can see it won't take much to do it. A little bit of imagination, a little bit of creativity, and then we get that capital in there. And when you see it, it's almost tantalizingly close. We can make a real difference here. It's so exciting.
Keesa: [00:13:34] Is it pretty scalable? Is it something that you'll be able to deliver once this use case, if you will, is worked out, you'll be able to deliver it elsewhere?
Lord Mayor: [00:13:39] Absolutely right. So much of this is scalable. So many of these models, when the models work, those will be transferable. You will be able to use similar models across the world in developing economies across the world.
Keesa: [00:13:50] What are some of the biggest objections that you're seeing to using that. I's scalable, we have the capital what still in the way?
Lord Mayor: [00:13:57] I suppose it's the things that always hold back it's process and systems and bureaucracy and all of those things that make things slip into the too difficult to do today sort of category. And they slip into the put them in the in-tray and we'll come back to them. Very often it's just that inertia factor that we're looking to do something different. But I would come back because I think it's a really important point, and I'm sure it's going to be discussed in a number of the sessions here in Mansion House over the next couple of days at the net zero delivery summit, the role of the international institutions such as the multilateral development banks, that I think is pretty much top of everybody's list of things to think about and to talk about. And I think we really do need to look very closely at this, and we probably need to move pretty quickly on this as well, because at the moment there is a danger that they're crowding out private finance rather than being the facilitator, that their business models put them in competition directly with private finance providers rather than facilitating the private finance model. So that's, I think, something we're going to have to come back to and look at pretty quickly because we want to get that one right.
Keesa: [00:15:03] And it sounds like that can be global as well. So how do you work your way around that? How do you partner with them? And to really explore the partnership as opposed to -
Lord Mayor: [00:15:11] Well, I think the big issue here is to say is getting national governments engaged on this topic because they're the shareholders in these institutions and they're the ones that will change the mandates of the institutions concerned. That's the critical role. We're going to be talking about it over the next couple of days. I've absolutely no doubt it's going to be a big issue up to and at COP 27 in Sharm el-Sheikh. And beyond that, because I think it's a very critical role. They play such a critical role in finance, in the developing economies of the world that we need to make sure that they're playing the right role in terms of facilitating the transition to net zero.
Keesa: [00:15:48] And also, I have to say, regulation in the UK has just really led the way. Again, do you see continued in your talks to these global countries? Do you see countries really adopting what the UK has already put down?
Lord Mayor: [00:16:02] There is a lot of interest in that. Absolutely. I mean, what we're doing at the moment and we're looking forward to changes coming through in relation to our pension funds, our life companies and the ability that they will have to invest in greener, more sustainable assets, long term infrastructure assets and suchlike, which at the moment they're under the current solvency regime, they are disincentivised to invest in them. Changes are coming there. John Glenn, the city minister, economic secretary to the Treasury, has announced changes which are which are being worked through with the regulators at the moment. Those are the sort of changes that are real interest. But we have to face it. A lot of the developing economies of the world, they don't have pension sec [??]. They don't have those pension funds that we've got here in the developed world. So, we're going to have to think about how we mobilize some of that capital that we've got here into the developing economies, too, because they just don't have the depth of the size and scale of pension funds that we enjoy here.
Keesa: [00:16:59] So and just to really wrap things up, we know that global temperatures are already at 1.1 degrees above the pre-industrial levels, meaning we don't have much time. Again, time comes around to play, to dramatically cut emissions. How can this be done in a way that really looks at the total picture? So, ensuring that the financial sector, they're working together and that they're partnering, ensuring that, as you said before, that no one is really left behind and ensuring that we can do that globally. What do you see as the main focus point that we need to look at to do that?
Lord Mayor: [00:17:32] It's all about the conversations that happen, the international conversations, bringing the key players in the finance sector together and having those conversations at the highest level in those organizations. So, we have the CEOs and the chairs of those organizations sitting down together and talking about what they're doing. It's a matter of getting their companies fully engaged and committed. Events such as the Net-Zero Delivery Summit, such as His Royal Highness, the Prince of Wales Sustainable Markets Initiative, which was also meeting here in London this week across a wider range of sectors than just the finance sector. All of these are really important because it's the conversations that happen at these events that actually begin to make the real difference in the private sector. And of course, as Lord Mayor, one of the things I can do is convene those conversations. This role is a tremendous platform to convene people, and I'm so looking forward to the next couple of days doing that with the Net-Zero delivery summit here in London.
Keesa: [00:18:28] Great, exciting information, and thank you so much for sharing. Lord Mayor of London. Thank you for joining us.
Lord Mayor: [00:18:33] Thank you very much.
Keesa: [00:18:36] I hope you enjoyed that conversation as much as I enjoyed conducting it. We'll hear more perspectives coming from the Net Zero Delivery Summit in future episodes. But for now, let's go to my conversation with John Simmons from FTSE Russell.
Keesa: [00:15:51] I am here with the senior research lead in the carbon transition at London Stock Exchange Group, John Simmons. John, thank you so much for joining.
John: [00:18:59] Happy to be here. Thanks for having me.
Keesa: [00:19:01] So let's talk about this report, this fantastic report that you worked on. I'd love to hear about it in the context of relevance to sustainable finance.
John: [00:19:12] Yes. So, in this report, we're looking at one of the foundational metrics in sustainable finance, which is scope one and two emissions. And previously, most of the financial community has considered this metric as done and dusted. It's fairly mature. People have been disclosing it for many years, companies as well, and there's been a fair amount of methodological alignment and we feel that this is an appropriate metric to base a lot of our financial products on a lot of our portfolio analytics on. And we are going back to basics to analyse essentially that there's actually some underlying problems with this metric, either in the fact that disclosure isn't increasing as much as we would like it to. It's not covering as much of the investable universe and two, the methods with which we use to cover that disclosure gap for companies that aren't reporting their carbon emissions tend to not be accurate. So that this metric, which we're basing a lot of our sustainable financial products on, is not as solid footing as we thought it was.
Keesa: [00:20:14] So let's talk a bit more about the top line, about what we are seeing that we could talk to the audience about. You mentioned the disclosure gap being the first piece, inaccuracy and reporting being the second piece. Are there solutions in terms of these two things?
John: [00:20:31] Yeah. So, in the past we've seen that certain jurisdictions that have implemented mandatory disclosure have seen a large increase in their overall disclosure rates for the various public corporates that you might invest in. And you're seeing the disclosure rates actually in the UK that has made mandatory disclosure. For instance, all of the almost every single member of the FTSE 100 will disclose. However, as you go into other jurisdictions and particularly emerging markets or small cap universes, you'll see that this disclosure rate will drop off precipitously.
Keesa: [00:21:03] All right. So, from there, let's talk a bit about investor expectations versus what we are actually seeing with Scope one and Scope two emissions. Do you have a sense of what these asset managers, asset allocators, what they want, but then actually what they're getting and then how we can fill the gaps there?
John: [00:21:21] Well, I think asset owners and asset managers basically expect a metric to cover the entirety of the universe. But I think what they are not necessarily understanding is that when there are estimations to fill in the gaps, the companies that do not disclose, those aren't necessarily indicated with the appropriate amount of qualification as necessary. So, for instance, the estimated emissions will go right alongside the reported admissions into portfolio reporting analytics, etc., and not have the associated, for instance, uncertainty bars that should be applied when you're dealing with emissions aren't coming from the company themselves but are instead estimated from our data providers.
Keesa: [00:22:01] Great. And John, just looking in terms of what's ahead of us in the immediate term for Scope three reporting, what type of framework should corporate reporters follow for their disclosure or does that even exist at this point for Scope three?
John: [00:22:15] Well, yes, every single issue that you're running into is Scope one and two emissions, you're going to see it at a larger scale with Scope three, because disclosure has hit the market a little less hard in Scope three, it's many more years behind. And the methodologies for basically understanding your scope three emissions are more complicated for companies to implement. And so, they're going to be more onerous for smaller companies to basically live up to. Estimations associated with scope three will be even less confident than estimations associated with Scope two, and you'll actually need to use more of them because the disclosure hasn't gone as far in the marketplace.
Keesa: [00:22:53] I love you talk a bit about the differences between what small companies will be able to do versus the larger companies. Could you dig a little more into that in terms of what they’d be [?] to report?
John: [00:23:03] Across most metrics in sustainable investing, you'll see the disclosure gap between large and small. Large companies have more financial cushion to have sustainability departments and put out large disclosure reports than small companies. And large companies are also more exposed to public opinion, which might demand these kinds of disclosures. And so, when you're getting to more complicated metrics that require a fair amount of counting, like Scope three and understanding of your supply chain, the downstream impact of your products, you're going to run into a problem where larger companies might be more able to provide these numbers and small companies. So, you'll see in a lot of the regulatory filings coming out for scope one, scope two, scope three emissions, there are sometimes carve outs for smaller firms, maybe with a little bit more of a grace period before they have to report their emissions footprints. Or maybe they don't necessarily have to report their scope three unless they're deemed to be material. But yes, we can see that very clearly in the record. For instance, Russell 2000, currently only about 10% of them disclose even their scope, one and two emissions.
Keesa: [00:245:12] Is it fair to say that as a running a small cap business that I do not have the same issues in terms of reporting as someone with a large company? Therefore, I cannot really think so much about the resources at this point. I can start thinking about that maybe next year in a couple of years. Is that something fair to say based on your research?
John: [00:24:34] Well, based on what is expected from investors, maybe.
Keesa: [00:24:38] Trick question!
John: [00:24:41] Yeah, I would say that reporting your scope, one, two and three emissions are important for all companies, no matter what the size is. And I think regulators and especially shareholders are continuing to see it more this way.
Keesa: [00:24:55] Great. I appreciate that. And last question for you, John. Can you give us a single data point that you think is the most compelling based on your findings?
John: [00:25:03] Yeah, I would say that for the 42% of companies that do not disclose their scope, one and two emissions and that need to be estimated, it's important to note that probably more than half of these values will be off by about 100%.
Keesa: [00:25:16] Well, John, clearly some really important data for companies who are reporting, as well as for the asset managers, asset allocators, there is a disclosure gap and there are inaccuracies in reporting carbon right now. But it looks like you're finding that when there are mandatory disclosures like we're seeing in many parts of the of the EU, disclosure rates increase and many members of, say for example, FTSE 100, they are disclosing because of the mandatory disclosure there, but also estimated emissions reporting being reported alongside actual emissions that we're getting from companies, there can be a challenge there. An uncertainty bar should be included for these estimated emissions. So fantastic information whether you're a large company or a small company, fantastic information about how to move forward. John Simmons, thank you so much for joining us.
John: [00:26:07] Thank you so much for having me. It's been great.
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