Rising to the challenge
Environmental Finance: What customer and market themes are driving your businesses?
Sylvain Chateau, global head of SI product management at LSEG: Climate risk is no longer a niche market or segment. It is one of the key risks that needs to be better assessed and is at the forefront of discussions. Also, we are seeing the exclusionary approach becoming the new normal across several sectors for clients allocating capital.
Elena Philipova, director, sustainable finance at Refinitiv, an LSEG business: The need for transparency because of standards and regulations is shaping the business solutions that we are bringing to market. We also see a growing market for nature-related data, as well as social aspects. We have been very active in that space, whether that is to do with diversity inclusion, gender, race, ethnicity, or disabilities. We see continuous momentum and market demand growing in those areas.
EF: How are your client conversations evolving in line with global regulatory developments?
EP: Very few client conversations fail to include sustainable finance, regulatory reporting and compliance requirements. That is especially true here in Europe, but broadly speaking as well. We are working very closely with the European Commission and other EU regulatory bodies across different regulatory workstreams, and we have a close oversight on global regulatory developments. We have lent our core assets to inform these regulations so that existing classifications, models and data insights can be utilised, and the regulation has a better chance of making an impact quickly – not in five years’ time.
SC: Today we are not only offering indices to clients. Now we must also demonstrate how the index is sustainable and offers the right metrics. I predict it is going to be one of the prerequisites of any new FTSE Russell index product. Sustainability characteristics are a part of every conversation we have when we build new products for clients.
EF: What data, disclosure and standardisation challenges must investors overcome?
EP: Education and training is probably a bigger challenge than data. Even if investors get all the data they need, the question is: do they know what to do with it? The industry has a long journey ahead in order to evolve its knowledge of how to make the most of these datasets.
There are a lot of data gaps as well. Investors and issuers must overcome this for their regulatory requirements, and we are helping them by developing our estimate models and offering different aggregation and median solutions. Closing in on those gaps with proxies in the interim will need to happen until regulatory reporting fills in the gaps.
It is important that when we talk about data, we also talk about the format that it needs to take for investors to apply it at scale. If you have two companies reporting their data in different formats, then investors cannot compare them. We have experienced this with UN SDG reporting around impact. It is completely unstructured and not standardised.
SC: We have found that some regulatory requirements are still not easy to interpret. For example, the EU’s ‘do no significant harm’ criteria under the proposed EU Sustainable Finance Taxonomy regulation, the way you interpret this can be very different from one service provider to another. There is still a lot of work to be done on this and it is a very challenging part of this journey.
EF: How can the industry improve ESG data quality, materiality and coverage?
EP: The market does itself a disservice by treating ESG data as a unique monster. A lot of the characteristics it has are similar to financial reporting and the journey that the industry has gone through there. I think we need to bring the two closer together and include ESG detail in financial statements. That will make it easier for the industry to integrate ESG into mainstream and minimise costs for issuers and investors.
SC: There is a lot of new data coming in that you can triangulate. Investors can harvest more data and have a better view of the performance of corporates on several different topics. That will also help improve the overall assessment that we can do on issuers.
EF: Looking ahead to 2022, what will be your priorities?
SC: There’s still a lot to do in terms of climate physical risk assessments. This is a challenge because it is very data intensive. We also want to be more predictive in the way we build our frameworks. We need to leverage more data sources and try to build new correlations to anticipate the early signals of potential issues. We also see a lot of interest in thematic investments. Broad ESG has its own limits, and our clients want to differentiate their products. There is a lot of innovation that clients can bring to market here.
EP: I envisage that we will double down on our collaboration efforts with different industry stakeholders and partners to accelerate the ESG agenda across global markets, asset classes and customer segments. We expect continued international collaboration efforts and the breaking down of silos to increase availability of standardised, actionable and trusted ESG data.