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ESG Becomes a Battleground of the Exchange Titans

Burgeoning market-data businesses are aggressively staking out positions in the sustainable-finance ecosystem

Friday, January 31, 2020

By Jeffrey Kutler

Listings and trading volumes are no longer sole determinants of success for stock exchange companies. They are not only trading and clearing multiple products, but have also built sizable data businesses, with market data revenue of $2 billion and exchange information services revenue totaling $3.7 billion in the U.S. alone last year, according to Burton-Taylor International Consulting.

Attuned as they are to investor preferences and the need for data and analytics to support them, exchange operators are embracing sustainability. Accompanying the groundswell of environmental, social and governance (ESG) investing is a financial-data growth engine that has exchanges in all major (and some lesser) market centers - not to mention research, information and index providers like IHS Markit, MSCI, Moody's and S&P Global - scrambling to establish near-term and sustainable advantage.

Adena Friedman Headshot
Nasdaq CEO Adena Friedman sees 2020 as a potential tipping point toward “a fundamental realignment of institutional capital.”

Some used the World Economic Forum in Davos, Switzerland, the week of January 20, as an announcement platform, fittingly given the headlining discussions around climate change and the event's “stakeholders for a cohesive and sustainable world” theme.

Attempting one of the biggest splashes was Refinitiv, a regular at Davos dating back to its earlier incarnation as Thomson Reuters Financial & Risk. The company announced the launch of the Future of Sustainable Data Alliance, with other founding members including the United Nations and Institute of International Finance. The objective is to define, and promote standardization of, data requirements to accelerate mobilization of capital into sustainable finance.

The Institute of International Finance made its own data-centered pitch in a joint survey with the European Banking Federation, published on January 28 and concluding that “the streamlining of measurement and disclosure frameworks, and increased international collaboration, are key to strengthening the climate-related risk analysis and reporting toolkit.”

LSEG, Nasdaq

Refinitiv, which has been in the ESG data business for more than 15 years, will become part of the London Stock Exchange Group, pending completion by competition authorities of a review of the $27 billion acquisition agreement reached last summer. LSEG thus could substantially augment its existing sustainable finance offering, which its website says “is focused on two key areas: green financing for issuers (both debt and equity); and information services - including indices and analytics - that enable investors to incorporate climate and sustainability considerations into their investment process.”

This year may be a tipping point for ESG investing, said a LinkedIn post by Adena Friedman, president and CEO of Nasdaq, which in December listed 19 ESG highlights and initiatives of the past year, including its own carbon neutrality. On January 22 in Davos, it announced a new reporting platform designed to simplify processes related to such frameworks as the Global Reporting Initiative (GRI), ISS, MSCI, RobecoSAM, Sustainability Accounting Standards Board (SASB), Sustainalytics, and Task Force on Climate-related Financial Disclosures (TCFD).

Companies can “input the information once, and we will then spread it out to all of the standard-setters and metric-makers simultaneously through an API structure,” Friedman explained.

“While still in the early stages of repositioning Nasdaq as a technology and analytics provider, we enter 2020 with clear momentum carried over from our strong finish in 2019, and will continue working to open additional areas of opportunity as the year progresses,” Friedman said in Nasdaq's earnings release on January 29.

Principles and Problem-Solving

From MSCI came a publication, Principles of Sustainable Investing, on “practices for ESG integration across the investment value chain.”

“The world is rapidly evolving due to dramatic environmental, social and governance shifts, including the effects and implications of climate change and the move to a low carbon economy, which will significantly impact the pricing of financial assets and the risk and return of investments, and lead to a large-scale re-allocation of capital over the next few decades,” said MSCI chairman and CEO Henry Fernandez. “The need for a set of guidelines that will help all investment institutions around the world manage emerging opportunities and inherent risks associated with ESG considerations in pursuit of long-term, sustainable investment performance has never been greater.”

The Bank for International Settlements produced a book on green swan risks - “potentially extremely financially disruptive events that could be behind the next systemic financial crisis” - and the “complex collective action problem,” not just for central banks or the government sector alone, of mitigating climate change.

“I think we might be on the brink of observing something that might be behind the next systemic financial crisis,” one of the BIS co-authors, Luiz Awazu Pereira da Silva, said in a January 20 Reuters article.

Henry Fernandez Headshot
ESG shifts will “impact the pricing of financial assets . . . and lead to a large-scale re-allocation of capital,” says MSCI chief executive Henry Fernandez.

Despite growing public awareness and efforts like the central-bank-initiated Network for Greening the Financial System, “the stark reality is that we are all losing the fight against climate change,” Banque de France Governor FranÇois Villeroy de Galhau wrote in a Green Swan foreword.

With regard to monetary policy, he said, “I have two strong beliefs . . . First, we need to integrate climate change in all our economic and forecasting models; second we need, instead of opening a somewhat emotional debate on the merits of a green quantitative easing, which faces limitations, to do an overhaul of our collateral assessment framework to reflect climate-related risks.

“In order to navigate these troubled waters,” the central banker continued, “more holistic perspectives become essential to coordinate central banks', regulators' and supervisors' actions with those of other players, starting with governments.”

Sustainable Development Goals

While Refinitiv lays claim to a long track record, it is far from alone in assembling an ESG product and service portfolio. The company and its London-based CEO, David Craig, have gone further in aligning their efforts with multilateral programs and organizations, notably the World Economic Forum and the United Nations Sustainable Development Goals (SDGs).

A partner of the UN Secretary-General's Task Force on Digital Financing of the Sustainable Development Goals, Refinitiv in September announced a transparency- and standardization-driven Digital Governance of Infrastructure (DGI) initiative; and the Sustainable Leadership Monitor (SLM), for metrics and benchmarking based on more than 400 ESG measures and data on more than 7,000 companies.

“Earlier this year, we made several pledges in support of the SDGs,” Craig said then. “We believe that the private sector has a key role to play in the achievement of the SDGs, and we are honored to be a strategic partner to the task force to harness the power of data to bring about insight and drive informed decision-making. Providing investors with access to trusted, holistic information about global infrastructure - including macroeconomics, projects, markets, financing, and geopolitical and operational risk data - is absolutely critical to achieving the SDGs.”

“Infrastructure investment is emerging as a critical policy focus for the public sector,” Craig added. “But data transparency remains a key obstacle to growth in private sector funding. Working with the G-20 and other multilateral and public entities to pursue policies focused on boosting private sector investment is therefore fundamental to addressing the infrastructure funding gap.”

Fundamental Data Requirements

The Future of Sustainable Data Alliance continues on those themes. The alliance stated: “Fundamental ESG data access and additional alternative data sets are seen as key drivers to help investors make sustainable investment decisions and positively contribute to the UN Sustainable Development Goals.”

David Craig Headshot
Refinitiv CEO David Craig says it is “critical to define and make ESG more of a science than an art.”

Said Craig: “The need to channel capital towards the UN SDGs is urgent and the financing requirement immense. Today, many asset managers state that they don't have enough data to help finance major transitions such as changes in demographics, climate change or addressing the shifts in global markets. It is therefore critical to define and make ESG more of a science than an art. Refinitiv is proud to be a founding member of the Future of Sustainable Data Alliance and is committed to providing investors with the data they need to channel capital towards the financing of the SDGs.”

Refinitiv's prospective parent company, LSEG, announced two sustainability initiatives in October: Green Economy Mark, recognizing companies and investment funds that derive 50% or more of total annual revenues from products and services that contribute to the global green economy, drawing on the FTSE Russell-developed Green Revenues data model; and the Sustainable Bond Market, enhancing the LSE Green Bond Segment, launched in 2015, with new dedicated segments for social and sustainability bonds.

In December, FTSE Russell announced an expansion of sustainable investment analysis in China and Japan; and on January 16 came additions to its climate risk-adjusted government bond index series. In June last year, LSEG acquired Beyond Ratings, a then five-year-old, Paris-based provider of ESG data for fixed income, as an investment in the LSEG Information Services business including FTSE Russell.

Trading for Trees

Fixed-income trading platform operator MarketAxess Holdings on January 28 announced “new capabilities designed to streamline clients' trading and sustainable investing in green bonds,” tied in with a “Trading for Trees” planting incentive. The functionality includes flagging of green bonds, issuers and dealers; a tool to identify green bonds with characteristics similar to non-green bonds; and a way to identify dealers providing green bond liquidity.

New York-based MarketAxess said its green bond volume jumped 108% in 2019, to more than $19 billion, for a 15% share of this segment in the U.S.

Ashley Schulten, head of responsible investing, global fixed income at BlackRock, said, “BlackRock has been a longstanding advocate for both enhancing efficiency in the fixed-income trading ecosystem and in the development of the green bond market. As an active green bond investor, ease in identifying securities and sourcing qualifying issues is helpful in managing our growing sustainability-focused funds and adds further support to this nascent but growing asset class.”

ICE and Partners

Intercontinental Exchange, the Atlanta-based parent of the New York Stock Exchange and other trading and clearing platforms around the world, also owns a $2 billion data services business which trumpeted its ESG trajectory with a pair of January announcements.

Through a relationship with Boston start-up risQ - a spin-out of Northeastern University's Sustainability and Data Sciences Lab - ICE Data Services will be providing quantitative climate risk analytics for the municipal bond market ecosystem, integrated with its muni pricing and reference data.

“By applying geospatial climate data to specific municipalities and securities, risQ has created a ground-breaking data product that leverages our strengths in the fixed income markets,” said Mark Heckert, chief product officer, ICE Data Services. “These new capabilities enable us to offer a unique product that helps market participants better manage climate risk as part of their overall investing and risk management processes.”

With BofA Global Research as its development partner, “ICE Data Services is adding ESG terms and conditions data to its existing reference data offering for U.S. and international listed corporations,” the company said on January 14. By the second half of this year, “ICE Data Services' customers will be able to subscribe to receive primary ESG data points, such as greenhouse gas (GHG) emissions reported, board diversity metrics, and nearly 500 other key metrics of ESG-related data. The dataset will be flexible, growing as ESG disclosure evolves.”

“Our investing clients are seeking consistency and transparency in ESG reporting,” said Candace Browning, head of BofA Global Research. “ICE Data Services already has a robust reference data offering covering millions of securities, and we look forward to working with them as they build out this additional functionality.”

Lynn Martin Headshot
“Our goal is to increase transparency for these metrics, enabling customers to better understand the risks and opportunities,” says ICE Data Services' Lynn Martin.

ICE Data Services president Lynn Martin said, “The ESG landscape is evolving rapidly, and investors are increasingly looking for comparable, decision-useful data. By supplementing our existing reference data services with quantitative ESG data points drawn from publicly available information, our goal is to increase transparency for these metrics, enabling customers to better understand the risks and opportunities that exist in the market.”

MSCI Extension

Last September, ICE expanded its relationship with MSCI, including a long-term extension of ICE's license for listed futures based on MSCI indexes; an MSCI license of ESG data to ICE Data Services for index construction; and integration of ICE fixed-income pricing and reference data into MSCI's platform.

ICE noted that on its platform since 2014, “average daily volume and open interest in futures contracts on MSCI indexes have grown at an annual rate of 30% and 21%, respectively, and the MSCI Emerging Markets Index Futures now rank in the top five equity index futures traded globally.”

“MSCI's equity indexes are among the most widely used globally, and the index futures contracts that our exchanges list provide valuable risk management opportunities for our global customer base,” Lynn Martin said. “As part of the extension of our relationship with MSCI, ICE Data Services will leverage MSCI's market-leading ESG data to offer ESG-weighted versions of ICE's market leading fixed income indexes.”

For its part, MSCI says that it “promotes ESG transparency across the investment value chain by making publicly available our ESG ratings of the most commonly owned companies worldwide, as well as our methodologies for determining ESG company ratings and constructing ESG indexes. By April 30, 2020, MSCI will also make public the ESG characteristics of all MSCI Equity Indexes and of the most commonly owned mutual funds.”

Deutsche BÖrse: More Products - and Work to Be Done

In a December posting on the website of Deutsche BÖrse Group, Kristina Jeromin, head of sustainability management, said its offerings include “more than 100 ESG indices including, for example, a specifically designed Low Carbon index family based on data from CDP, the Carbon Disclosure Project. We have introduced two Eurex futures there at the beginning of [last] year.”

What's more, assets invested in ESG exchange-traded funds on Deutsche BÖrse's Xetra market rose by 217% in 2019, to €23.2 billion, representing about 3% of total assets invested in ETFs and making this the fastest-growing category in the exchange group's ETF segment, Deutsche BÖrse reported on January 23.

ESG ETF trading volumes increased 130%, to €2.9 billion, as 62 new products were listed. Deutsche BÖrse noted that the first ESG ETF was listed on Xetra in April 2006 - the iShares Dow Jones Eurozone Sustainability Screened UCITS ETF (DE) - and “it took another 10 years before the demand for sustainable investment strategies increased significantly and issuers began to offer a broader range of ESG ETFs.”

“Within this context, two major developments in the financial sector come together: the trend towards passive investments via ETFs and the desire for sustainable investments,” said Stephan Kraus, responsible for Deutsche BÖrse's ETF segment. “The products target professional investors as well as private investors.”

However, as suggested by the title of Jeromin's article - Sustainable Finance is Still a Niche Topic - she sees much work still to be done in terms of communications, definitions and standards.

“Everybody is generally agreed that sustainable investment and overall sustainability on the financial markets are of great importance,” Jeromin said. “However, the companies listed are often still on their way to defining what this means for them and how this will be reflected in their reporting. Investors, on the other hand, are in part still placing too little focus on requesting and evaluating such information.

Kristina Jeromin Headshot
Deutsche BÖrse “has an important function to enhance this discourse” on definitions and standards, Kristina Jeromin says.

“This is where Deutsche BÖrse in its role as a dialogue platform has an important function to enhance this discourse. The aim is to establish sustainability as an essential component of the respective core business. This is essential for the future sustainability of any business model and holds true both for financial institutions and companies in the real economy.”

The DB1 executive added that “precise standards” are necessary for establishing benchmarks: “In comparison to the mainstream market, we have no clearly standardized data records that can serve as a basis for corresponding investment decisions, the granting of loans, etc. This is why Deutsche BÖrse is supporting the EU action plan on sustainable finance and, in particular, the development of a common understanding of sustainability, especially taxonomy. We should start now to transfer these first definitions to the market and work with them; this is at the moment simply the lowest common denominator.”

Hong Kong Consultation and Global Context

Hong Kong Exchanges and Clearing, which made and withdrew an acquisition bid for London Stock Exchange Group last year, launched an ESG disclosure review consultation in May that drew 153 responses and culminated in December with “significant improvements to the ESG governance and disclosure framework for Hong Kong-listed companies,” said HKEx head of listing David Graham. “The changes reflect the exchange's commitment to enhancing Hong Kong's ESG regulatory framework and to meeting investor and stakeholder expectations in accordance with international best practices.”

Among the changes, taking effect July 1, are mandatory statements by boards on their consideration of ESG matters; application of “materiality,” “quantitative” and “consistency” reporting principles; and upgraded environmental and social KPI (key performance indicator) disclosures.

HKEx referred in its report to parallel ESG developments in various jurisdictions, including Hong Kong Securities and Futures Commission's “survey on integrating ESG factors and climate risks in asset management”; Shanghai Stock Exchange's governance rules for its Science and Technology Innovation Board; European Commission climate guidelines, which integrate recommendations of the Task Force on Climate-related Financial Disclosures; the Bank of England's plans for climate-risk stress tests and the Financial Conduct Authority's Climate Change and Green Finance discussion paper; Australian Securities and Investments Commission's guidance on climate change-related financial disclosures and review of officer and director oversight of non-financial risk; and the UN-convened Net-Zero Asset Owner Alliance of insurers and pension funds targeting carbon neutrality in their investments by 2050.

Elsewhere, in 2019, Cboe Global Markets issued its first ESG Report; and Euronext, following a 2018 ESG consultation, moved to “finalize our stakeholder engagement process and create a Euronext Materiality Matrix.”

Also, reported in recent weeks: A Green Bond Accelerator initiative in Abu Dhabi; and formation by Korea Exchange of an ESG team dedicated to sustainability and social-impact data and disclosure standards.

Anticipating Demand

When CME Group in October announced its E-mini S&P 500 ESG Index futures, Tim McCourt, CME global head of equity index and alternative investment products, called it “another example of how CME Group is not only meeting the changing risk management needs of our customers in an evolving global marketplace, but also offering choices that allow for the alignment of investment decisions with personal or institutional values.”

Reid Steadman, global head of ESG indices at S&P Dow Jones Indices, said, “Investors are no longer simply viewing ESG indices and benchmarks as niche market tools, but are increasingly integrating ESG metrics to manage their core portfolios. We believe demand for innovative ESG index-based products, especially in the U.S. and Europe, will continue to grow and become more mainstream as market participants seek to better align their sustainability and investment goals.”

Elaborating on her view of 2020 as a “tipping point year” and the implications for financial markets, Nasdaq CEO Friedman said:

“Morningstar recently quoted record net inflows of $18 billion into ESG strategies in ETFs and mutual funds for 2019; BlackRock is committing to making sustainability a core part of their investment strategy for the first time. This is encouraging and a wake-up call to boards and CEOs everywhere. If a fundamental realignment of institutional capital takes hold, the magnitude of funds that could be shifted as a result could move the needle in the global effort to combat climate change much faster than many are now expecting. 2020 could be a monumental year for both profits and purpose.”




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