Taxonomy, Data Crucial For Sustainable Finance

Shanny Basar

Standardisation of data and taxonomy are critical to ensure that green finance becomes permanently embedded in global capital markets according to a conference at the London Stock Exchange.

The UK Green Finance Taskforce opened the London market this morning and the ceremony was followed by a conference Welcoming the final report of the EU High-Level Expert Group on Sustainable Finance. The UK government set up the Green Finance Taskforce in September last year to bring together the financial sector, including experts from Aviva, Barclays, HSBC, Legal & General and the Bank of England, with academics and sustainability experts. At the end of next month the taskforce will publish its recommendations on accelerating investment in the transition to a low carbon economy, and creating high-value jobs and opportunities for UK businesses.

The High-Level Expert Group on Sustainable Finance, was set up by the European Commission in 2016 to make recommendations for a financial system that supports sustainable investments, and issued its final report at the end of last month. The report will form the basis of the Commission’s action plan on sustainable finance and will be discussed at a conference on 22 March 2018 in Brussels before legislation is proposed.

The recommendations in the final report included building a classification system, or ‘taxonomy’, to provide market clarity on what is ‘sustainable’; an EU-wide label for green investment funds and a standard for green bonds; and making sustainability part of the mandates of the European Supervisory Authorities.

Nikhil Rathi, chief executive of London Stock Exchange plc and Green Finance Taskforce member, said at the conference: “Data and taxonomy have come to the fore. Progress has been made as Barclays used a public database to identify the most energy efficient buildings for a green bond.”

In September last year Barclays issued a €500m ($620m) green bond which was the first by a UK bank using UK assets.  The proceeds are being used to finance and refinance Barclays residential mortgages on properties in England and Wales which are in the top 15% of the lowest carbon intensive buildings, based on estimated energy efficiency.  The bank identified the properties from the Energy Performance Certificate data realised in bulk by the UK government last year.

Rhian-Mari Thomas, chair of the green finance council at Barclays and Green Finance Taskforce member, said at the conference: “We have data on mortgages that shows a correlation between energy efficiency and lower defaults.”

FTSE Russell, the London Stock Exchange’s index business has also developed analytics and environmental, social and governance data on listed companies.

Rathi added: “There is a need for common global standards for green finance beyond bonds. The product set is broadening and includes, for example, insurance-linked securities and renewable energy funds.”

Sir Roger Gifford, chair of the Green Finance Initiative and chair of the Green Finance Taskforce, said at the conference: “Green finance needs to become a permanent part of capital markets and will only succeed if there is a commercial imperative.”

David Harris, group head of sustainable business at LSEG and HLEG member, said the momentum in sustainable finance is “incredible”.

“About 70% of new business from European asset owners at FTSE Russell has been related to ESG,” Harris added. “There is demand but it is critical to get the right data and also help issuers understand ESG reporting requirements.”

Last week FTSE Russell announced the creation of the FTSE Women on Boards Leadership Index Series. The new index series increases exposure to companies based gender diversity at the board level and how well they manage their wider social impact.

Harris continued that the HLEG report gave a framework for a sustainability taxonomy across asset classes, not just for green bonds. The group also recommended that a technical committee is set up this year to develop the taxonomy and consult with market participants.

“Demand for green bonds outstrips supply,” Harris added. “Moody’s has predicted that issuance will be $250bn this year but this is still a minuscule portion of the total fixed income market.”

Daniel Klier, group head of strategy and global head of sustainable finance at HSBC and Green Finance Taskforce member, said at the conference that a survey by the bank found that 97% investors want to invest in green finance but 84% felt that products were inadequate.

“The use of green finance needs to be widened with discipline to avoid accusations of greenwashing,” added Klier. “We need standardisation and transparency.”

Last year the Financial Stability Board’s Task Force on Climate-related Financial Disclosures published a voluntary framework for listed companies to report on their transition to a low-carbon economy in a format that is useful for investors.

Klier said: “The Task Force on Climate-related Financial Disclosures is the biggest game changer if we get it right. This year we need to create standards and decide what good reporting looks like.”

He continued that HSBC has adopted the the voluntary framework and this has already changed behaviour within the bank.

“We now include climate risk in future cashflows in our credit assessments,” Klier added. “We need to embed carbon prices in our scenario analysis in the same way as we model the impact of different oil prices.”

Related articles

  1. Institutions can manage their bitcoin exposures in existing portfolio management and trading workflows.

  2. ETC said bringing BTCE to Cboe Europe is a logical step as demand for crypto recovers.

  3. Daily Email Feature

    From Small-Caps to Big Homes

    Former buy-side trader Tim Olsen now does real estate in Big Sky Country.

  4. Pension Fund Assets Reach Record

    DPD provides pensions schemes with the potential for yield premium and strong income stream.

  5. Pando Asset is the fifth new crypto ETP issuer to join SIX Swiss Exchange this year.