Travelling together on the climate transition path

If you want to go fast, the proverb says, travel alone. If you want to go far, travel together. The path is long as climate change and wider sustainability challenges continue to reshape the landscape of the global economy. Therefore, it is essential that we travel together.

This reshaping has enormous and complex economy-wide implications. Tracking and understanding them is beyond the capacity of any one actor – it demands partnerships and collaboration. Given our central position in the financial ecosystem, LSEG is playing an active role in convening the market and broader stakeholders on climate. 

Some of the most impactful partnerships in sustainable investment have brought together asset owners, data providers and academia. FTSE Russell – LSEG’s index and benchmark business – played a key role supporting the creation of the Transition Pathway Initiative (TPI), a landmark asset-owner-led initiative set up to assess companies’ preparedness for the transition to a net-zero global economy.

Since its establishment in 2017, the TPI has grown to over 150 supporters with over $60 trillion in assets under management and advisement (as of March 2024). It has become one of the world’s most authoritative sources of open-access information on how companies, banks and now sovereign issuers are managing the risks and opportunities presented by the climate transition.

The TPI’s methodology was developed by an international group of asset owners, in partnership with the TPI Centre, hosted at the London School of Economics and supported by data provided by FTSE Russell. It assesses companies on two dimensions:

• Carbon Performance, which considers the extent to which companies’ emissions targets are aligned with the goals of the Paris Agreement;
• Management Quality, which evaluates companies’ governance of greenhouse gas emissions and climate risks and opportunities.

To assess sovereign issuers, the TPI uses the ASCOR framework, which covers countries’ emissions pathways, climate policies and climate finance.

We have worked with the TPI to put its insights into action. In 2020, the Church of England Pensions Board – one of the TPI’s asset-owner founders – asked us to design an equity index which incorporated the TPI’s assessments, partially weighting index constituents depending on their TPI scores and other climate metrics. It subsequently allocated £600 million to the index.

The resulting FTSE TPI Climate Transition Index Series  now comprises 13 benchmark and sub-indices, including indices focusing on the US, Japanese, Australian markets, and a global core infrastructure index. Asset owners have allocated billions of dollars to strategies tracking the indices. They include the New York State Common Retirement Fund, which in late 2021 chose to allocate assets to an index fund based on the Russell 1000 TPI Climate Transition Index.

FTSE Russell often uses TPI scores, in combination with other data inputs, to build an investment framework addressing multiple climate transition challenges, which feeds into other index products. In 2022, in collaboration with the Japanese exchange JPX, we introduced two climate indices which use TPI data. The FTSE JPX Net Zero Japan 500 Index and FTSE JPX Net Zero Japan 200 Index incorporate a range of measures of climate exposure, including the TPI’s Management Quality and Carbon Performance scores.

The work of the TPI, supported by LSEG, has found wide application. It forms one of the assessments carried out for Climate Action 100+, a collaboration of more than 700 institutional investors working to ensure that the world’s largest emitters respond to climate change. It helped to inform guidance from the UK’s Transition Plan Taskforce, a body launched by the UK government to develop “the gold standard” for private sector climate transition plans.

Much like the corporate response to climate change, the assessments that underpin the TPI continue to evolve. Last November, the TPI unveiled a new framework for assessing Management Quality (MQ), currently available in beta form on the TPI website. It tests companies on whether they have transition plans that include defined, quantified and financed actions to get to net zero. This provides investors with additional insights into the robustness of companies’ transition plans and whether they are credibly implementing them.

The assessment also increases the number of indicators tracked, from 19 to 23, and includes a wider assessment of Scope 3 emissions – that is, those associated with a company’s supply chain and the use of its products.

At LSEG, collaboration and knowledge sharing with the investment ecosystem is key to what we do. We have a culture of working closely with industry leaders and clients, in particular asset owners, product issuers and exchanges, to develop the tools they need. We believe it will be vital for such a collaborative approach to be more widely adopted as investors and asset owners seek to successfully contribute to solving the climate crisis and the other sustainability challenges we face.

To learn more, see our climate transition data and climate transition solutions