The London Stock Exchange Group (LSEG) said investors should not have to exclude polluting companies from their European Union climate benchmarks, and urged policymakers to add a ‘transition’ category to its sustainable fund rules.
The influential group is the latest to wade into the conversation about whether, and how, the EU should reduce the regulatory burden of its sustainability agenda on the private sector.
In a report published today, LSEG noted the EU’s commitment to reduce corporate reporting requirements by 25% to make European firms more competitive on the global stage. This is likely to be carried out primarily through the introduction of a new package of amendments to be tabled by the European Commission next month.
LSEG said this represented “a critical opportunity to streamline the regulatory framework, making it more scalable and usable by the financial sector and the corporate community”.
The report – EU Sustainable finance regulation: Enhancing and simplifying to enable the transition – argues that a number of laws should be revisited.
Changes include a removal of the current requirement for Paris Aligned Benchmarks to exclude polluting companies.
The EU’s label can only be adopted by indices that boot out issuers generating more than 1% of revenue from coal, more than 10% from oil and gas, and power utilities that have a GHG intensity of more than 100g CO2 e/kWh/.
“That in effect, is an exclusion on almost all power utilities globally,” said LSEG, adding that the rules also ban polluting industries from being underrepresented in PABs – compared with their underlying benchmarks.
“Consequently, the weight of other higher carbon sectors may need to be disproportionally increased to counteract the exclusions and meet this rule.”
LSEG, which also called for the EU’s climate benchmark labels to focus on forward-looking information instead of targeting a 7% annual decarbonisation rate for constituents, endorsed research done by the Net Zero Asset Owner Alliance on how to create more viable rules for benchmarks.
The paper also calls on the European Commission to make it easier for investors to allocate to high-emitting companies within the Sustainable Finance Disclosure Regulation, calling for the addition of a “climate transition fund category” into the framework.
The category should “support a variety of decarbonisation strategies” and not insist on the exclusion of polluting companies if they have credible transition plans, LSEG argued.
Other demands include a simplification of the EU Taxonomy “to make it more usable to a broader audience”, the adoption of corporate transition plan requirements in line with guidelines from the Transition Plan Taskforce, and a rethink of corporate emissions data, including Scope 3 emissions, to align expectations more with global standards.
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