The transition to a low-carbon or “net zero” economy

David Harris, Head of Sustainable Business, LSEG
David Harris, Head of Sustainable Business, LSEG
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The transition to a low-carbon or “net zero” economy is set to become one of the defining issues of the twenty-first century.

The scientific community has clearly set out the risks, and many policymakers and regulators are now taking action.

Increasingly many companies and institutional investors recognise the risks posed by climate change and the rationale for strong action has never been clearer. Sitting at the heart of the world’s financial markets, London Stock Exchange Group (LSEG) is well positioned to support the global transition to a sustainable low-carbon economy.

Just recently the FCA set our proposals designed to improve the climate change disclosures for companies and other issuers, building on previous work of the Financial Stability Board’s (FSB) Taskforce on Climate Related Financial Disclosure and the UK Government’s streamlined Energy and Carbon Reporting Framework.

The Governor of the Bank of England, Mark Carney, said in a speech in October that “firms that align their business models to the transition to a net zero world will be rewarded handsomely. Those that fail to adapt will cease to exist.” Both highlight the environmental and commercial imperatives of sustainable business models and investment.

With an estimated $30 trillion in assets under management now implementing sustainable investment strategies, investors around the globe are increasingly focused on sustainability. This

figure is set to increase, with investment in Environmental, Social and Governance (ESG) based strategies growing by 20 per cent annually.

To support the transition to a sustainable low-carbon economy, London Stock Exchange recently launched two new initiatives on its markets: the Green Economy Mark for equities and the

Sustainable Bond Market (SBM). Together they are designed to support issuers, companies or investment funds, to raise sustainable capital and demonstrate their credentials.

London Stock Exchange’s Green Economy Mark recognises companies and investment funds listed on the Main Market and AIM that derive 50 per cent or more of their total annual revenues from products and services that contribute to the global green economy so called “Green Revenues”.

The 50 per cent threshold is important because it captures not just the ‘pure play’ issuers that immediately come to mind, in fields like renewable energy and waste management, but a wide range of issuers contributing to environmental solutions. The 74 equities that have received the mark include business across sectors, from manufacturing to transport, agriculture, chemicals and financials.

By raising their visibility and profile we aim to drive awareness of the breadth of the green economy and identify issuers that may not otherwise have considered to be active in

this space.

The Green Revenues data comes from FTSE Russell and is being used as a factor by increasing numbers of investors to increase their investments in green industry companies as part of an approach to mitigate investment risks from climate change. One example is LGPS Central pension fund which manages the pooled assets of nine Midlands-based local government

pension scheme who announced a £2bn allocation to a new FTSE climate-risk adjusted index just a week ago.

Our second initiative, the Sustainable Bond Market builds upon the success of London Stock Exchange’s Green Bond Segment, the first of its kind from a global exchange when launched in 2015. To the existing Green Bond Segment, we’ve added dedicated segments for social and sustainability bonds. These new segments further enable investors to distinguish between

different types of sustainable bonds, based on independently verified frameworks and use of proceeds.

There is also a segment for ‘issuer-level classified’ sustainable bonds raising the profile of standard bonds from green issuers. For companies in the Issuer-Level segment, Green

Revenues account for 90 per cent or more of the entire business, so any capital that they raise, supporting any part of their business, is considered green.

Yorkshire Water has both received the Green Economy Mark and has a sustainability bond on the SBM. Other Yorkshire companies to receive the Mark include Augean (who clean up

hazardous waste), Benchmark Holding (technology to make food more efficient and sustainable), ITM Power (hydrogen power), Polypipe Group (recycled products, water infrastructure), Renew Holdings (environmental infrastructure) and Xeros Technology (water conservation).

Both the Green Economy Mark and the Sustainable Bond Market build on expertise from LSEG’s FTSE Russell business. For almost 20 years, since the launch of FTSE4Good Indexes, FTSE Russell has helped promote sustainable investment, developing indexes, data and analytics tools.

This sustainability expertise and data is now being applied to help our issuers consider climate change and other sustainability priorities, to communicate more effectively with investors,

and to use this to raise capital.

Financial markets must play a pivotal role in the transition to a greener, more sustainable economy. These new initiatives underline London Stock Exchange Group’s commitment to

playing our part - developing practical solutions to support issuers and investors in this transition.