In a recent interview on FinextraTV, David Harris, the Group Head of Sustainable Business at the London Stock Exchange Group, discussed upcoming trends and developments in sustainability for 2021. He emphasized the remarkable acceleration of sustainable finance initiatives, particularly fueled by the COVID-19 pandemic and the proactive stance of the Biden Administration.
Harris noted that significant momentum has emerged from asset owners, particularly pension funds on the East and West coasts of the U.S., which have been instrumental in driving growth in sustainable finance. However, he pointed out that corporate funds have yet to take significant action in this area.
Referencing a 2020 LSEG survey, Harris revealed that globally, more than 58% of asset owners were integrating environmental, social, and governance (ESG) criteria into their smart beta index funds. When considering regional differences, over 91% of European asset owners have embraced ESG, compared to just over 40% in the U.S. He anticipates a shift in the U.S. Department of Labor’s stance, which may encourage greater participation from U.S. asset owners in sustainable finance.
Discussing the upcoming COP26 summit, Harris expressed optimism that the delay to November has provided an opportunity to amplify momentum for sustainability initiatives. He highlighted a shift in focus from merely reducing temperature increases to developing comprehensive net-zero plans that include not only governments but also corporations and investors. The return of the U.S. to the Paris Agreement is expected to contribute significantly to this focus.
Harris underscored the importance of investor-company interconnection, particularly noting the Climate Action 100+ initiative, which aligns major investors with corporate climate goals. The Transition Pathway Initiative (TPI) serves as a foundation for data used in this initiative, and LSEG is working to incorporate TPI into its index designs.
Moreover, he mentioned that LSEG is enhancing established indexes like FTSE4Good while aligning methodologies with TPI standards, addressing market frustrations with inconsistent standards.
On the topic of regulatory standards, Harris noted widespread calls for the International Organisation of Securities Commissions (IOSCO) to mitigate regional inconsistencies. He also highlighted the establishment of a sustainability standards board by the International Financial Reporting Standards Foundation (IFRS) and the integration of frameworks by the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) to potentially create a unified climate protocol.
Harris conveyed optimism regarding the convergence of these standards into a more coherent framework, viewing 2021 as a pivotal year for global standardization in sustainability.
Another critical aspect discussed was taxonomies, with various models emerging worldwide. LSEG’s Green Revenues 2.0 data model analyzes companies’ revenues across multiple green sectors, anticipating that investors will soon be required to reflect their portfolio alignment with the EU taxonomy for regulatory reporting.
Finally, Harris indicated a growing reliance on diverse data sources, such as big data, AI, and satellite imagery, while emphasizing the necessity for robust and transparent information. He predicted that the pace of innovation in data will only accelerate in the coming year.
For deeper insights into standards, taxonomies, and regulatory issues affecting climate action, don’t miss Finextra’s upcoming event, Sustainable Finance.Live, scheduled for May 11-12. Register here for more information.