"It can be frustrating to see that after over a decade of engagement on this we are still asking for mandatory corporate disclosure on climate, but the shift towards judging companies on performance can’t happen without it.”
Speaking with Euromoney at the annual UN Climate Summit in Dubai, the London Stock Exchange Group’s David Harris doesn’t want to waste too much time mulling over what could have been.
Had climate data reporting become mainstream in the early 2000s, perhaps the sustainable transition would be in better shape now because investors would be selecting which companies to fund according to their sustainability performances as well as their financial ones.
Nevertheless, here we are. Just over 28 years after the first COP took place, the climate data piece of the puzzle is finally materializing.
Milestones
Last year was indeed a big one for reporting frameworks. The International Sustainability Standards Board (ISSB) released its inaugural standards IFRS S1 and S2, which were endorsed by several jurisdictions including the UK.
The ISSB also took over the responsibility of the Taskforce on Climate-Related Financial Disclosures (TCFD), which means that the IFRS foundation now monitors listed companies’ progress on disclosures around the world.
Importantly, the two standards were endorsed by the International Organization of Securities Commissions (Iosco), which indicates that regulators are getting ready to implement them.
Corporate reporting standards are the most important thing because they feed into everything else
And in the EU, the Commission adopted the European Sustainability Reporting Standards (ESRS), which come into effect this year. The European Financial Reporting Advisory Group (EFRAG) has been working closely with the ISSB to ensure interoperability of both standards.
“Corporate reporting standards are the most important thing because they feed into everything else,” says Harris, pointing out that 42% of companies in the FTSE All-World index still don’t report on Scope 1 and 2 emissions.
Harris assumed his role as head of sustainable finance strategic initiatives at LSEG in 2022. He joined FTSE Russell back in 2002 to build the now widely recognized FTSE4Good Index Series, before leading the sustainable index business for a decade.
LSEG is well known for its index business, even if that now represents a rather small part of the group’s activities. In 2021, LSEG acquired financial data provider Refinitiv for $27 billion, to become one of the largest data providers on the market.
At COP, Harris was keen to advance LSEG’s call to get all governments to adopt mandatory disclosure rules aligned with the ISSB standards by 2025.
“The UN-PRI [United Nations Principles for Responsible Investment] are backing us on this call, and we are working with them until the next Iosco annual meeting to get as many market participants as possible on board and show this is what the market wants,” he says.
And because getting listed companies to report isn’t enough to address the blind spots in asset owner’s portfolio carbon footprints, COP28 was also a chance to unveil the proof of concept for the Net-Zero Data Public Utility (NZDPU) project, a global open repository for private-sector climate transition-related data.
Forward looking
But is it enough for corporates to supply carbon-intensity data if nothing is then done to lower that intensity?
For Harris, forward-looking information such as emissions-reduction targets and transition pathways are fundamental to the disclosure question, but there is a key distinction between the act of standardizing the reporting and the tools used to make judgement calls on whether what the information reveals about a company is good enough.
“A lot of that is being pushed by the providers of capital in the asset-management industry,” says Harris, adding that asset owners are increasingly asking for ways to factor in environmental, social and governance data into passive investment allocations.
To do that, LSEG uses the Transition Pathway Initiative (TPI) climate performance indicators. The group began using TPI’s management-quality and carbon performance data in their indexes to weight companies according to their actions on transition.
The former is a descriptive governance metric that looks at companies’ management of their greenhouse gas emissions, as well as the risks and opportunities related to the low carbon transition. The latter is an evaluation of companies’ carbon emissions against climate scenarios consistent with the Paris Agreement.
Asset owners can evaluate companies’ climate performance according to TPI metrics, and if the company improves, it will get a higher weighting in the index and therefore receive more capital.
When asked if leaving it up to the investor might not delay progress towards meeting the goals of the Paris Agreement, Harris says that this is exactly why getting mandatory climate-data reporting is such a fundamental first step, even after all these years.
“The market-pull factor is important, because investors will assume the worst of companies who don’t disclose this information,” he says. “Like financial data, investors need every company to report the same information. But it is up to them to decide if they think a company is doing what it needs to be profitable in the long run or not.”
