The investment world is changing. Investors are realising that regulations are increasingly mandating for lower carbon products and services which has a knock on effect on organisations with higher emissions, and consequent risks for any money invested in those companies.
I invited David Harris, the Group Head of Sustainable Business at London Stock Exchange Group & FTSE Russell to come on the podcast to dig into this in more detail. I warned David in advance that finance is not my forte so he needed to keep it simple enough for me to comprehend, and in fairness he did an excellent job.
We had a fascinating conversation, I learned loads. I hope you enjoy it too.
If you have any comments/suggestions or questions for the podcast - feel free to leave me a voice message over on my SpeakPipe page, head on over to the Climate 21 Podcast Forum, or just send it to me as a direct message on Twitter/LinkedIn. Audio messages will get played (unless you specifically ask me not to).
And if you want to know more about any of SAP's Sustainability solutions, head on over to www.sap.com/sustainability and if you liked this show, please don't forget to rate and/or review it. It makes a big difference to help new people discover the show. Thanks.
And remember, stay healthy, stay safe, stay sane!
Music credit - Intro and Outro music for this podcast was composed, played and produced by my daughter Luna Juniper
All these investors with this new 50 trillion of assets behind them are trying to be joined up in how they engage companies so that they are being very clear in their requests for companies to make sure they're developing credible climate strategies, which may involve themselves making netzero commitments but being very clear, then setting the targets and how they're going to achieve that.Tom Raftery:
Good morning, good afternoon, or good evening wherever you are in the world. This is the climate 21 podcast, the number one podcast showcasing best practices and climate emissions reductions. And I'm your host, global Vice President for SAP. Tom Raftery. Clemmer 21 is the name of an initiative by SAP to allow our customers calculate, report and reduce their greenhouse gas emissions. In this climate 21 podcast, I will showcase best practices and thought leadership by SAP, by our customers, by our partners and by our competitors if their game in climate emissions reductions. Don't forget to subscribe to this podcast in your podcast app of choice to be sure you don't miss any episodes. Hi, everyone. Welcome to the climate 21 podcast. My name is Tom Raftery, with SAP and with me on the show today I have my special guest, David. David, would you like to introduce yourself?David Harris:
Hi, Tom. great pleasure to be here. Hi, David Harris, I'm on head of sustainable business at London Stock Exchange group.Tom Raftery:
Okay. And people wouldn't often associate climate and London Stock Exchange in kind of the same sentence. So what's the London Stock Exchange got to do with anything about the climate?David Harris:
Yes, certainly can the extent that maybe it's worth setting out to kind of bite context a little bit, just who we are. So London Stock Exchange group has got three main divisions, we've got capital markets, which is where London Stock Exchange itself sits, we have data and analytics. This is where the index business footsie Russell sits, also where refinitiv with London Stock Exchange group and refinitiv came together earlier this year, when our one organization and we've got our post straight business, which is where lcdh assets, so we have quite a diversified company, really providing a lot of markets, capital, market infrastructure, and data and analytics. So climate is hugely relevant across all of these areas, how we became the first exchange based company to become to set out our net zero commitments. So this is this is very relevant for us. This is important for all different players within capital markets. On one hand, this is obviously very relevant for for the corporate issuers that are listed on London Stock Exchange, and we have a role to support them and help them kind of navigate this area. And it also kind of you encourage and support them to help understand what what kind of information and data investors need on this. And that's the that's the other part of this, which is that we are also supporting the investment community with the data, the analytics and the benchmarks to help them integrate climates into their investment strategies into their investment allocations. So we're also we sit right in the middle of debates like the disclosure debate, what what what kind of information should should companies be reporting on these topics? Well, actually, the quality of the index is the data and analytics as a as a high degree of relevance, because the quality of the corporate reporting has an impact on all the fat. So we're also a great advocate to a lot of work also with policymakers, with governments on the sustainable investment and finance agenda. I was a member also of the EU High Level expert group on sustainable finance, our advice forms 100 page set of recommendations to the EU, which then form the basis of the EU sustainable finance action plan. As you're probably aware, the EU is now put a huge amount of focus on regulations on sustainable finance. Certainly, I see. So we Yeah, this is relevant for us, but also for our clients. Maybe I should explain also what our net and net zero commitment and what that what that actually meant. Sure. So two parts to it. One part is about our, our own emissions, like any company, obviously, we've got our own direct carbon emissions from from our, from a lot of our kind of data servers from our travel and from our suppliers. And so we've set targets to reduce emissions by we've got a target set by 2025 2030. on a trajectory to to net zero. We've had those approved by the science based targets initiative, but also the more interesting part is well, how do we influence capital markets? How can we support market wide decarbonisation? And that's really then around how do we support issuers and investors on this agenda across three areas one around data and disclosure, and how do we help drive better global standards around bound data. We're doing a lot of work with other exchanges on that Mark Carney and who's since leaving the Bank of England is now got a role with the UK Government and with the UN, ahead of cop 26. In November, the big climate summit on climate finance, the humans, our group CEO David Schwimmer wrote a letter to exchanges globally and asked him to work with us to help develop to be clear model guidance, which every exchange can push outs, to its issuers to encourage consistent climate reporting. we're basing all of that on tcfd. It's not about reinventing the wheel, but the exchanges in their own voice trying to encourage and support consistent global climate reporting. So that's a translation sculpsure secondaria, which is around how do we support the growth of green industries? Through taxonomies, through classification systems, through things like a green economy mark on the stock exchange, and through sustainable and green bonds and transition bond segments on the exchange? And then thirdly, through how do we support climate transition, that can be for investors and the kind of indexes and data analytics that can be for around how do we help support corporates on this agenda, coming up with credible climate strategies that is relevant across the whole sector, including in high carbon sectors. So those three areas data disclosure, green economy, and, and supporting climate transition.Tom Raftery:
Okay. And what I'm hearing there is that you've got three main groups of stakeholders, you've got the regulators, you've got the companies that are reporting, and you've got the investors who are looking at those reports, and then making investment decisions based off those. Is that fair?David Harris:
Yes, it is fair, I like us providers of finance, as well, and the banks.Tom Raftery:
Okay. So four. So of those I mean, I, I the the obviously the regulators are incredibly important. And you know, everyone will follow the regulations as they're laid out, or they should do at least for the corporates who are reporting on for the investors who are investing in the finance years who are financing those investments. But are you mentioned earlier climate benchmarks, is that the kind of thing that's been taken into account in the decisions that these organizations are making?David Harris:
Yeah, that mean, there is a, I mean, there's really a revolution that's taking place in institutional investing. There are huge changes going on across the market that so far have been largely driven by pension funds, and the other kind of what often gets referred to as asset owners who have been wanting to switch their investments to account for climate risks and climate opportunities. And that has been leading to big changes across asset managers, and data providers and benchmark providers. As we lookTom Raftery:
this is this what people are calling the kind of divestment movement.David Harris:
It's much broader than that. So so. So, divestment, I'd say, is actually in one small proportion of this, but it's it's it's much more fundamental. In when you look at, we do a survey every year of asset owners, and look at the look at the trends in their investment strategy. So we have around 200, asset asset owners, and effectively the pension funds, sovereign wealth funds, insurance, and they then have their money managed by the asset managers. But so we do a survey at the asset owners as they're setting really the direction of all of this. And every year, the proportion of asset owners who say that they're looking to integrate environmental, social governance issues across all of their assets grows. It's now reached 85%. In Europe, globally 72%. So this is a very large proportion. Then we also another question is, of the difference sustainability themes, or ESG themes, you know, which ones are the most important, and the top focus area is climate 64%. So climate risk is very much front and center here. And we see that also in the regulations that are coming. And we see it also in the we set through the major investor initiatives. So I talked about, you know, our net zero commitments, investors are making net zero commitments and trying to understand well, what does that mean for their portfolio of investments? The one of the initiatives is the net zero asset managers Alliance, 5 trillion of assets now, but behind that every, every month, it's a rapid it's going up and the head of GAAP 26. We'll just see that further and further, but they're committed to really thinking through what is and and taking action to drive a reduction in emissions through their investment portfolios.Tom Raftery:
Right. So they will be doing how much would you say it's their country? Well, thisDavid Harris:
5 trillion have made this kit specific commitments to net zero. There's a broader commitment, there's 50, over $50 trillion of a un behind a what's called climate action. 100. Plus, this is many of the world's largest asset owners and asset managers, engaging with those companies who they see as strategically and systematically important for climate change. So typically kind of the highest level of emitters, but also operating in sectors and industries where they can have really kind of catalytic impacts. And they're engaging with is 100 to 100. Plus, because it started off with 100 companies, it's now 160. And all these investors with this 50 trillion of assets behind them are trying to be joined up in how they engage companies, so that they are being very clear in their requests for companies to make sure they're developing credible climate strategies, which may involve themselves making net zero commitments, but being very clear then in setting the targets and how they're going to achieve that. And actually, also footsie Russell, part of us are providing data to what's called, there's another organization called the transition pathway initiative. It's backed also by the London School of Economics, Grantham Institute to provide the academic work there. But footsy Russell data feeds into that. And it's all it's all published on the, on the London School of Economics website, they have under the TPI website that that feeds into Seo 100 Plus, and this covers things, both the kind of the climate governance that companies have the Do they have the new Do they have the right senior people responsible for climate changes? And is it as an as an issue? Are they doing? Are they integrating this into their risk management? Are they reporting on their carbon emissions? Are they are they setting targets to reduce that? Are they linking this to executive remuneration, these are also form effectively, kind of disclosure points within the task force for climate related financial disclosure, tcfd recommendations as well. So it's, so it's all kind of LinkedIn into that too. But this is this is becoming very powerful. Ca 100 plus published their benchmark. So they, their benchmark was not a benchmark in the way that we were talking about benchmarks being in, it's something that would be an investable index, but really a league table of is 160. Companies with all of the data against these different data points, which are then engaged on. So it's very transparent, it's all public. And the idea is that the investors are very much coming together, doing to engage companies on this. But as you can imagine, this is also really affecting the kinds of not just the data and analytics, but also the benchmarks and the indexes which, which were, which were providing to the investment community now.Tom Raftery:
Interesting. And so if I, the CEO of a publicly traded company, this obviously has huge implications for me and my organization, my company, how aware are organizations of this? And what moves, if any, are they are they taking to address it?David Harris:
So it's a great point, I think most companies are not, are not really aware of how a lot of the different sustainability and climate data that they publish, really gets used by the investment community. And we see that very clearly as we're working with them, and indeed, our our benchmarks effectively then provide the basis for for investment strategies. So there's really, there's two different ways that investors will will structure investment funds. One is kind of traditional stock picking, those are called active fund managers. The other type of investment is what gets called passive investments. And then it's where they follow an index exactly, they try and follow the returns of the index. So for, for for a, an equity or stock market index. That will be the index will represent the percentage that is invested in each individual company. And the traditional indexes would be weighted by the market capitalization of each company. So how many shares What's the price of the shares work out the market cap, now you're investing more in the larger companies, and you're investing less than the small, smaller ones. So it's a proportional, kind of and is representative of the markets. What we're what we're seeing now and when we're one of the big shifts is going on is for climate benchmarks. Now, what I mean by that is we take one of these standard indexes, so might be saying the footsie global developed index, where it could be the footsie all share. And instead of each in each company being weighted only by its market capitalization, we will increase the weight of the company or Decrease the weight of the company, depending on how well positioned it is on climate. So the kinds of measures we're using will be things like you their carbon intensity, it will include actually their climate governance. So talked about that. The transition pathway initiative, TPI will use the TBI scores to influence that, we will look at what proportion of their of their revenues are coming from green products and services. We call that green revenues. We have a green revenue classification system that categorizes 133, kind of green micro sectors, everything from new advanced batteries and desalination, through to renewables or energy efficient lighting. So we're looking at what level of revenues companies have from this. And we're overweighting under weighting them on that as well as on these other measures. We're also looking at things like stranded assets, he talked about divestment and often that divestment is a being of fossil fuel companies. And that's a very blunt instrument to use, what what I'd say most institutional investors are looking at climate risk or doing a tool to understand what what is the investment risk associated with that and come and so, they will May, and again, this will influence some of the waiting where companies have got a lot of exposure to certain high carbon reserves. And if that represents to me will often normalize that say, by the market capitalization, what's the carbon intensity of their total reserves, but, so, these are all the uses different climate factors to overweight and underweight companies. And what these very large investors will be doing is not using these little satellite portfolios, but taking this as their their core investments in their for their what called call their passive funds. So, this is actually creating quite a huge scale reallocation of capital, which is going on moving from these kind of more kind of standard kind of market neutral indexes to ones where you are overweighting companies which are better positioned on climate underweighting companies, which are less well positioned on climate. And the data which companies are reporting on all of this is being collected by different different data vendors, including ourselves, but many of our peers toTom Raftery:
disclose your project or someone like that,David Harris:
yes. So we will be in that will be incorporating we typically collect data, we will collect data directly our own analysts will go out and be scrubbing out using various technology as well to try and collect that publicly reported data from companies will also be taking feeds in from other sources, including CDP. And and also giving companies a chance to check that data. So companies do get contacted to see if we've missed anything, but we do like the data to be published and in the public domain. But sometimes because of a range of places where companies report this information, it can come from a number of different different places.Tom Raftery:
Okay, and for for companies who are starting to become aware of this, is there like a public framework that they can access to go Okay, I need to publish this, I need to publish this I need to public You know, I'm saying?David Harris:
Yes. So I mean, we looked at to try and cover all of that ourselves. So we were collecting data across all of the different ESG standards. There's obviously a lot going on now globally, with the standard bodies coming signed to come together. Also with some of the International regulatory coordination bodies psychiatr, SCO, and IFRS, who are helping kind of regulators come together in setting global standards. On climates, you have, I think, very helpfully clear global framework here being tcfd, the Task Force on climate related financial disclosure, which came from the Financial Stability Board. And that is very much from the basis for, for this kind of consolidation around standards. We and others will be collecting their data to those to those standards. For us, there's a portal where we're companies are able to review the data that we have collected on them to check that. But it's it's important that companies are disclosing climate data and are getting good at that. And you I think, sometimes there's a, there's a misunderstanding that, you know, that all of the different investors are directly going into their reports and collecting information. That's not typically how it works. It will be a variety of vendors who are going in sourcing that data and then feeding it out to the whole marketplace. And then it feeds into all of these different analytics and indexes. In some areas, things like carbon emissions reporting scope, one, scope two, scope three has been improving over the years very rapidly and there's obviously mandate Some countries, including in the UK, already, we've got tcfd requirements becoming increasingly mandatory. But one area, which I think companies are not doing enough on, is breaking out their revenues. So this is it. This is, in some ways a much easier ask, this is looking at looking at the segments of revenue that companies are reporting, and identifying where they're agreeing products and services, services that provide solutions to environmental and climate challenges. And then separating it separating out the revenue associated with that particular sub segments. So that could be it could be a lighting company, that's the and we're wanting to break out their LED lights versus their lead tungsten lights, it could be auto sector and electric vehicles versus combustion engine vehicles, across every sector thinking through what are what are the green products and services here? And how can we start to, to break out those revenue because investors need that many investors are wanting to over allocates, increase their exposure to green industries, okay. And rather than being binary, actually a company is or isn't, is appreciation that actually, you've got this shift going on. Okay, it's a spectrum. It's a spectrum. And it's slowly becoming an increasing proportion of many company's revenues, that most companies are not breaking it out properly today. And so it also means that we and others are having to estimate that if we're having to estimate it, we're probably being a bit conservative in estimating it. And we're probably not capturing a lot of the green revenue that companies may actually have in practice.Tom Raftery:
Fascinating. It occurs to me that a lot of the reporting around this kind of stuff in companies traditionally has been going, you know, has been a function of the marketing organization. And I think from what you're saying, it's very obvious that needs to shift to the finance organization. Is that a fair comment?David Harris:
Absolutely. This year, we need investment grade data. So it needs to be reliable, it needs to be consistent. Sometimes that's very challenging. As companies start putting more emphasis on it, they suddenly realized that the way they were doing before, didn't actually stand up as they start to kind of get their internal audit teams more engaged. And they have to restate their data. Yeah, that's fine. If they need to do it, get on with it, get the data, right, this is going to become more and more important. And the investment flows, we can see it changing from the work we're doing with, with many of the world's largest asset owners, when we're building this now much more systematically into index designs for them, but we need we need good data. And so it's really important for companies to get that right.Tom Raftery:
Okay. And, again, a question coming from pure naivety on my part 50 trillion sounds like a lot. And it's not the only amount. But if you could kind of try and put a percentage on it. What percentage of the investment community I know, you said from the surveys at the start, it was around 64% on climate and even higher ESG in general, but what percentage of the investment community overall is moving this direction.David Harris:
So this has been driven really by the institutional investor markets to date. That's what I mean by that is really that pension funds and sovereign wealth funds,Tom Raftery:
they're typically big, right, they're typicallyDavid Harris:
they're big and ends being globally, they will be representing something like 30 40% of global markets, and it is a large majority of them. And as you go up the scale, the bigger more sophisticated ones are more advanced than the smaller ones are catching up. And earlier on in their journeys on this, the retail sector and the as individual investors and high net worth investors are also waking up to this. And so this is this is this is now starting to become a much bigger focus for for those investors too. And for them, actually, it may then also be driven, not just by kind of enlightened views about investment risk and opportunity as a kind of a long term investors, which the institutional lessons coming at it. They're also very much about what do they kind of ethically wanted to invest in, but they're their personal values. And so in some ways, they may go even further, in terms of what they're in what they're doing. And it may be more binary, I've been talking quite a bit about tilting exposures across different companies, there is much more likely to be much more binary and black and white between actually I just don't want to invest in certain sectors. And I do want to invest more in those sectors. So expect to see similar things, but maybe it will be more, more extreme among some of those groups.Tom Raftery:
Okay, and this is a flash in the pan, this isn't going to revert to the way it was anytime soon, right. This isn't this is rather, this is the tip of a wedge, and it's only going to get more So far, so I would hope anyways, is that a fair assessment?David Harris:
Yeah, I mean, I, I started working in this field 20 years ago, when I in sustainable investments. And you know, back then it was it was very niche, it is the the momentum is grown really, pretty much every year since then from very low starting base. Now, it's pretty, it's pretty unstoppable. This is really a transformation that's taking place, kind of across across the markets, the level of sophistication around a lot of this is still quite low. Yes, lots of investors are very engaged, and they are looking at how they can shift their entire portfolios. But the other data they're working with the analytics, it's still in many ways, a lot of this is still quite early on. And the sophistication around this is rapidly shifting and evolving. Also moving from a world where there's a lot of quite a lot of cottage industries doing this. Now, all of the big, big players are very focused on it, that you were looking at where much of our focus in terms of our data analytics and benchmark innovations, this probably Max is the number one focus area now for London Stock Exchange group, and for our data analytics business, use it so there's been a huge, huge shift and and you know, that's common across the market,Tom Raftery:
the the genies out of the bottle.David Harris:
It is and I think it's going back, it's a one way journey. And you think sustainability is is is a journey, there isn't a single endpoint to this. And at the moment, just given the urgency of the climate agenda, that is really the main kind of theme, which is causing so much shift and change. Super,Tom Raftery:
super. Okay, David, we're coming towards the end of the podcast. Now, is there any question I haven't asked you that you kind of wish I had? Or is there any topic we've not addressed that you think it's important for people to be aware of,David Harris:
I suppose one thing which we haven't gone as far on, I guess, has been the regulatory shift. True. From what I've seen, to date, most of these changes in the market have been driven, fundamentally, by really, I guess, a kind of enlightened self interest from, from investors, right, from really, the the these are financial material investment issues. And that's been leading to the climate in particular, is what we're seeing, I think now is another equally powerful force, which is the force of regulation. And so, you know, the EU has been a big actor here. Now, the US under a Biden administration is going to become very significant already hearing quite a lot a lot from the SEC. In the US. In Asia, China's putting a massive focus for their five year plan around climate and decarbonisation, and, and putting a big focus on climate finance as part of that. So a big part going forward is going to be regulatory drivers. Currently a lot of focus on disclosure, and on trying to develop areas like taxonomies, which can help in terms of things like green revenue. So I was talking about earlier, the challenge, I think, for all of us, is how we make sure that well intentioned regulation is effective and helpful. And what it doesn't be is joined up what we don't want to see which isn't going to be helpful for investors, it's not going to be helpful for companies, it's not going to be helpful for societies either. If all the regulators go off in different directions, we need to work together to be joined up, and we need some global consistency around office.Tom Raftery:
That makes sense. Okay, David, that's been great. If people want to know more about yourself about the London Stock Exchange group around climate benchmarks, or any of the things we've discussed in the podcast today, where would you have me direct them,David Harris:
we have a actually a series of events running up to cop 26. Together with the principles for Responsible investments, PRI, so pri and l sag, I've got a cop 26 climate action series of webinars. We've got the next of those coming up in June in June and there'll be another one in October. So I'd recommend maybe joining those to understand what's happening on the on the investment side of things.Tom Raftery:
David, that's been awesome. Thanks so much for coming on the show today.David Harris:
Great. Thank you, john.Tom Raftery:
Okay, we've come to the end of the show. Thanks, everyone for listening. If you'd like to know more about climate 21, feel free to drop me an email to Tom firstname.lastname@example.org or connect with me on LinkedIn or Twitter. If you'd like the show, please don't forget to subscribe to it in your podcast application of choice to get new episodes as soon as they're published. Also, please don't forget to rate and review the podcast. It really does help new people to find the show. Thanks. Catch you all Next time