LSEG has a critical role to play in bringing transparency to bear on the massive volumes of sustainable finance we will need to meet net zero targets, says Cornelia Andersson.
Cornelia Andersson is group leader of sustainable finance and investing at LSEG. For more information, click here.
Environmental Finance: Massive investment is needed in the transition to a sustainable economy. What role do you see for ESG data?
Cornelia Andersson: There’s an enormous funding gap. Governments and corporates have committed to net zero by 2050, and we are currently some way off meeting that target. What is missing to transition to a low-carbon economy is financing – particularly transition financing and investment in energy infrastructure.
The question then becomes, what is blocking that financing? One answer is data. Without access to accurate, reliable, transparent data, investors cannot make sensible investment decisions to allocate capital. So, while there is great appetite in the investor community to invest in sustainable projects and assets, investors are also subject to very stringent requirements around managing risk and returns for their clients in turn. Without access to robust, transparent ESG data, they can’t accurately compare investment opportunities, measure the risks or track the returns.
EF: Some investors remained concerned about transparency in ESG data. How do you balance transparency with your own intellectual property?
CA: Transparency is essential. It comes back to creating enough comfort and robustness to support the allocation of capital to these initiatives and outcomes. Sustainable finance and the market for ESG data is a new segment. Compared to other parts of financial markets, we don’t have the same widely accepted reporting standards and disclosure frameworks. We’re making progress – the International Sustainability Standards Board (ISSB) launched its new ESG disclosure standards at the London Stock Exchange in June – but we’re not at the same point as we are with fundamental financial data.
That means that transparency – regarding methodologies, data lineage and data sourcing – is very important. It is a particular challenge with estimated data. There are still 40% of listed companies globally that don’t disclose Scope 1 and 2 carbon emissions. There are many cases where estimated data is valuable or, indeed, essential, but it is important that providers are transparent about it, down to sharing details on their calculations and model assumptions.
There is a tendency among data vendors to take a black box approach. For us, transparency is a North Star. Our ESG datasets are built on transparency with reported data at the core. We also actively publish methodologies, research papers and data overviews for our core and modelled solutions to improve transparency and share our approach in any emerging market segment.
EF: Investors are undertaking multi-asset sustainability assessments. What challenges are they facing on the data front?
CA: The publicly listed equities space is reasonably well covered in terms of sustainability data. But fixed income accounts for a bigger part of the financial markets, and a lot of the investment to achieve a low-carbon economy will need to be in infrastructure – perhaps $150 trillion by 2050. In addition, a very large number of companies are privately held. So, while we talk about data gaps for publicly listed companies, those data gaps are a lot bigger in other asset classes.
Regulation has a role to play, in terms of mandating disclosure. In Europe, the Corporate Sustainability Reporting Directive will be significant there. But the fixed income piece is really interesting. It is an essential lever in corporate development, including to successfully transition to lower emissions infrastructure and business models.
Being able to assess the ESG credentials of fixed income instruments will be key. We’ve spent a lot of time working on this: we’ve mapped close to a million corporate bonds to their issuers, and to their ESG profiles. We will continue to expand coverage and analytics in fixed income and asset classes such as funds, deals and infrastructure.
EF: Meanwhile, both issuers and investors face a growing regulatory burden. What is LSEG doing to help?
CA: We hear from our clients across the spectrum that regulation is the number one driver for engaging with sustainability. It’s a big focus. Here, we do a few things. First, we work actively with policy makers, standard setters and regulators involved in the creation of these frameworks. We have a seat at the table, and we provide an industry perspective to these discussions. That also means we tend to have a very good line of sight on what regulations are likely to emerge.
We also provide a range of solutions for key regulatory frameworks, such as the Sustainable Finance Disclosure Regulation, the EU Taxonomy, or the Task Force on Climate-related Financial
Disclosures recommendations. Whether you are an investor, an asset manager or a corporate, the underlying data is key: our products can help our clients ensure that the core underlying data is robust and transparent, so they can slice and dice it in different ways to meet the different regulatory reporting requirements.