Unearthing the insights in sustainable finance data
At the historical roots of the London Stock Exchange, at Jonathan’s Coffee House in 1698, was the need for information. The lists of currency, stock and commodity prices published by John Castaing provided the insights needed by speculators to make investments and by entrepreneurs, explorers and early industrialists to raise capital. That flow of information watered global commercial expansion and, later, the roots of industrial revolution.
Three centuries on, the information generated across the London Stock Exchange Group (LSEG) is helping to catalyse the latest of those industrial revolutions: the transformation of the global economy towards sustainable modes of production and consumption that will ensure that humankind can exist within the world’s natural boundaries. Our work in sustainable finance and energy commodities is providing the information and insights our clients need to understand the emerging green economy.
Sizing the world’s sustainable economy
In global markets, size matters. Whether asset owner, asset manager, broker, investment bank or consultant, resources are limited. Difficult decisions need to be made as to where to commit capital, whether financial or human.
FTSE Russell’s pioneering work in tracking and sizing the green economy has helped our clients look past the advocacy and the hype to understand how quickly the green economy is growing, and which subsectors present opportunity. We first began calculating the revenues that listed companies were generating from the green economy in 2008. Our latest report, published in 2022, found that these green revenues represented a market capitalisation of over $7 trillion or 7.1% of the global economy in 2021, up from around 4% in 2015.
That research tracks revenues generated by over 18,000 equities, within the FTSE Global Equity Index Series and the Russell 3000 Index, of which some 5,000 are found to have green products and services. The green economy encompasses 133 micro sectors, across energy, transport, water, waste and pollution control, sustainable food and agriculture, and environmental services. It is considerably more diversified than many assume, including highly regulated defensive sectors such as water treatment and pollution control, as well as more cyclical sectors such as electric vehicles.
LSEG also monitors capital directed towards sustainable finance. Refinitiv Lipper tracks global flows into environmental, social and governance (ESG)-themed stock, bonds and mixed-asset funds. This research helps both investors and issuers understand evolving appetite for sustainable financial products – finding, until 2022, year-on-year increases since 2011. Last year, however, difficult wider markets and a political backlash against ESG investing generated headwinds, turning flows marginally negative.
Putting the numbers in context
The raw data only reveals so much. Extracting insights from the numbers is where our analysts add real value to our clients.
Our Sustainable Investment team can point to numerous examples of working with clients to apply research and analysis to answer pressing questions. These include:
Understanding decarbonisation in equity benchmarks. We worked with the Net-Zero Asset Owner Alliance (NZAOA), a UN-convened grouping of institutional investors, to better understand changes to the emissions profiles of key equity benchmarks. These emissions profiles can change significantly depending on the metrics and measures used; this ground-breaking research probed the strengths and weaknesses of various carbon exposure metrics, and proposed a ‘dashboard’ approach to track the decarbonisation of portfolios and benchmarks over time.
Green equity exposure in a 1.5°C scenario. Climate benchmarks, which incorporate carbon emissions targets, can help investors manage the climate risk their portfolios face. However, there is a lack of consensus among investors as to how to measure and capture exposure to climate solutions – the opportunity side of the ledger. This research, conducted in partnership with the Institutional Investors Group on Climate Change (IIGCC) and using our green revenues data, provides bottom-up and top-down analysis of how green economy exposure within global benchmarks would change in a scenario where the global economy pivots to hold warming to below 1.5°C on a long-term basis.
Global trends in corporate tax disclosure. The sustainability transition also incorporates a wider set of social and governance issues, such as the amount of tax that governments are able to raise from multinational corporations. However, investors have historically struggled with inconsistent and underdeveloped frameworks to measure corporate tax transparency. Working with the Principles for Responsible Investment (PRI), we reviewed trends in corporate tax disclosure to help investors understand tax risk across their portfolios.
Tracking a changing energy landscape
The world’s energy markets are undergoing unprecedented change, driven by technological innovation, geopolitical upheaval and the transition to a net zero global economy. Liquefied natural gas (LNG) is the world’s fastest growing natural resources commodity, followed by gas, while renewable gases and low-emission hydrogen technologies are gaining favour as investment and policy solutions. Together, they are central to fundamental changes across sectors, and both developed and emerging markets.
Understanding the behaviour, direction and divergence of these markets is crucial to both corporate strategy and government policy. Our actionable research, data and analysis supports the development of a more transparent marketplace and ensures our clients are well-positioned to understand the systemic changes across decarbonising and decentralising markets and sectors.
From operational issues to systemic shifts, financial risks to commodity cycle challenges, our analysts assess and communicate risks, opportunities and solutions to support clients’ understanding of energy markets in transition, where precedence can account for little, enabling them to be well-positioned to make trading, business and investment decisions for a decarbonised world.
Taking our clients with us
Analysis and interpretation are key in a world of near limitless data. Nowhere is this more important than sustainable finance and the energy transition, where the stakes could scarcely be higher. Greenwashing – whether accidental or intentional – is a constant challenge, and hype and advocacy can cloud the picture.
At LSEG, we are applying experience dating back more than three centuries to help investors and issuers put sustainable data into context, and better understand the risks and opportunities presented by the emerging green economy.