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GFI0021

Written evidence submitted by London Stock Exchange Group

Summary of recent highlights

London Stock Exchange Group (LEG) welcomes the opportunity to submit a response to the EAC’s Green Finance Inquiry. LSEG is committed to supporting British and global actors in their transition to achieving a low carbon economy, through the UK’s financial expertise.

The UK is a leading global financial centre for green finance. Since COP23, the UK has seen significant momentum in global green finance issuance. Capital markets have been able to support increased investment in sustainable development both at home and abroad.

Recent highlights include:

• There were 7 green bonds in November:

• India Power Finance Corporation, became fifth green bond by an Indian issuer – issued on the International Securities Market on 29 November, raising USD 400 million
• Tideway has issued, raising GBP 450 million – now largest corporate issuer of sterling denominated green bonds
• Orsted, the Danish energy producer, issued its first green senior bond on 24 November, raising €750 million
• Fingrid, the Finnish electricity grid operator, issued its first green bond on 23 November, raising €100 million
• Westpac, the Australian bank, issued its first ever international green bond on 22 November, raising €500 million
• Toyota Motor Credit, the finance and insurance provider, issued a green bond on 21 November, raising €600 million
• Barclays Plc became the first UK bank to issue a green bond on 6 November, raising €500 million

• As of 31 December 2017, there has been a 92 per cent growth in green bonds listed on London Stock Exchange and a 78 per cent increase in money raised in 2017.
• In 2017 27 green bonds listed in London, raising $10.09 billion, compared to 14 green bonds which raised $5.65 billion in 2016.
• In total, there are 64 green bonds listed in London that have raised over $20.67 billion in aggregate terms across seven currencies.
• In November, FTSE Russell also launched 2 new indexes which support environmental, social, governance integration into passive investment strategies.

Answers to specific inquiry questions:

1. How can the structure of incentives across the investment chain be changed to promote long-term sustainable development?

LSEG would welcome the consideration of a variety of incentives to support long term investment in sustainable development, as well as increase issuance of green products in the UK.

Fiscal incentives for issuers and investors

We believe that fiscal incentives/exemptions specifically on the green bond market would provide of the market and support the UK’s status as a destination for high-quality bond issuance. Suggestions include the following:

Stamp duty. One way of doing this would be to remove stamp duty from green bonds – mirroring welcome policy moves which have previously been taken on the abolition of stamp duty on AIM shares.

Subsidies. Another way of doing this would be to offer grants for the verification process of the green bond, which is already being offered in other fixed income markets such as Singapore.

Issuer incentives for retail tranches. We believe that green finance is an opportunity to engage the retail investor and increase their stake in capital markets. We would welcome consideration of incentivising issuers to allocate a tranche of their green bond to retail investors, benefiting from tax relief or subsidy as mentioned in the two previous suggestions.

2. Is the Government’s level of ambition on green finance - and the mechanisms it sets out in the Clean Growth Strategy – sufficient to generate the investment needed for the UK to meet its environmental commitments?

LSEG welcomed the launch of the Green Finance Taskforce jointly by the Department for Business, Energy and Industrial Strategy (BEIS) and HM Treasury, and the Clean Growth Strategy showed high ambition.

3. How will the Clean Growth Strategy feed into the work underway by the World Benchmarking Alliance on how an SDG index could be established?

The UK has world leading capabilities in terms of ESG analysis and measurement. Through its focus on green finance, the Clean Growth Strategy will drive capital towards companies with greater exposure to the green economy and lower carbon footprint.  This transition will be captured by the methodologies of ESG ratings providers such as FTSE Russell, part of London Stock Exchange Group. This is just one element of the United Nations 2030 Development Agenda, supported by the SDGs. But the approach will pave the way for investment in social projects.

We agree that indexes / benchmarks can be a powerful way to drive voluntary improvements. In particular we would like to reference:

1. FTSE4Good :  the pioneering work led through London that has impacted corporate behaviour and disclosure over 15 years. There is much evidence of the impact FTSE4Good has had on corporate practices – there is public naming of the companies that get added and deleted at each review and it has help catalyse real improvements in practices and disclosure  – see See Mackenzie et al (Nov 2011) athttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=1966474 and Slager (2012) athttp://www.nottingham.ac.uk/business/ICCSR/assets/The-FTSE4GOOD-index_engagement-and-impact.pdf.  Indeed the momentum here is growing: The move by FTSE Russell 4 years ago to only use ESG data and information that companies publicly disclose is a further driver. The UK Government could public back this and add profile to help drive further improvements. Its worth noting that this is happening in other markets with the Government Pension fund of Japan (GPIF) backing (and allocating to) the FTSE Blossom Japan index which is directly aligned with FTSE4Good Criteria. Further in Malaysia and South Africa they also back this approach, work with the local exchanges and FTSE Russell to use these indexes to help drive corporate improvements.  
2. Transition Pathway Initiative. Given it is led by UK organisations; EAPF, Church of England, LSE/Grantham Institute, and data from FTSE Russell. It is based on public data and is made publicly available. Its also all about engagement with investee companies so is ideally placed.

4. Is the Green Investment Group (GIG) fulfilling commitments made by Macquarie to ensure the Bank ‘remain[s] one of the leading investors in green infrastructure in the UK and Europe’?

NO COMMENT

5. How will leaving the EU affect the UK’s ability to leverage investment into low-carbon and environmentally friendly projects in the UK?
6. What options are there for the UK’s future relationship with the European Investment Bank? What would be the implications for green investment in the UK?

The European Investment Bank has been an important and welcome source of funding for a number of projects. Objectives of supporting the transition to a low carbon economy are shared by the UK, EIB and many actors around the world.

We believe there is enormous opportunity to mobilise long term capital in the UK to greater effect. The UK is home to one of the most sophisticated capital markets in the world with long experience of facilitating infrastructure and green financing.

1. Mobilising long term investment

HSBC’s announcement last year to choose Legal & General’s Future World Fund, based on the FTSE Climate Balanced Factor index which incorporates three climate change factors to reduce portfolio risks from climate change, and to optimise opportunities from the low carbon transition, as its equity default fund for HSBC’ DC pension scheme for 80,000 UK employees.

Pensions. We would encourage further similar moves, including exploring whether local government or HM Government pension schemes could consider such a fund in the future.

ISAs. We would encourage assessment of green ISA products, whether lifetime ISAs or stock and shares ISAs which track a fund which incorporates climate factors.

7. Given the work being carried out by the EU’s High Level Expert Group on Sustainable Finance, where should the UK’s newly created Green Finance Taskforce concentrate its efforts?

The Green Finance Taskforce’s work is ongoing and LSEG is proud to be a member of this taskforce.

8. How effective are the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations likely to be at moving investment into ‘clean’ sectors?

The TCFD recommendations have the potential to drive the reallocation of capital towards the green economy by encouraging financial and non-financial organizations to take into account the risks and opportunities for their business strategies deriving from climate considerations.

From the perspective of climate companies, the voluntary disclosure of green revenues and investments in their annual reports will drive their own future capital allocations, and will provide investors with the information they need to capture the opportunities provided by the transition to a low carbon economy.

Financial institutions by taking a long-term approach to asset allocation, will prioritise investment in companies and assets  that can demonstrate a measurable contribution to climate change mitigation.

However, disclosures must be matched by measures that encourage greenfield investment in environmental opportunities and technologies, guaranteeing a pipeline of “clean” projects, companies and assets to which capital can be driven.

9. The Government has said it will ‘encourage’ publicly-listed companies to adopt the TFCD’s recommendations on climate risk disclosure. How could it do this? Is a voluntary approach sufficient?

We are supportive of the Government’s announcement on the TCFD proposals and believe these are important in considering all the relevant types of climate related disclosure needed along the investment chain including “green revenues”. That the TCFD work also recognises that investors have a key role in engaging investee companies to consider how the low carbon transition will affect long term business models and strategy.

HM Government’s approach to disclosure of companies has been well balanced and supports the UK’s reputation for robust and responsible reporting standards. While we do not suggest additional prescriptive corporate reporting burdens on listed companies, there are some areas where carefully designed government action would help catalyse better data for investors.

We recognise the effectiveness and market leadership of the “comply or explain” approach adopted in the UK with regard to disclosure and governance standards, and recommend that the same approach be followed in the implementation of the TCFD recommendations both for financial institutions and listed companies.

We recognise a benefit of companies including a breakdown of segment revenues into sub-segments where associated products or services have a clear environmental utility. This relatively simple disclosure puts information into the hands of investors who wish to re-allocate capital towards the green economy.

We would also support a proportionate approach which does not exert overly burdensome reporting requirements on growth companies i.e. small and medium sized enterprises (SMEs), some of which are publicly listed. We note the requirement of the “Companies, Partnerships and Groups (Accounts and non-financial reporting) Regulations 2016” which sets out non-financial information disclosure requirements for companies with more than 500 employees.

January 2018