LEI in Sustainability Reporting and
Environmental, Social and Governance (ESG)
Building a global climate information architecture requires a universal way to identify and authenticate the legal entities involved. Efforts to standardize ESG data continue to evolve, with industry experts highlighting that those identifiers that remain consistent and enable interoperability will be vital tools when seamlessly connecting emerging ESG datasets with existing data infrastructures. Success in this regard will allow firms to gain valuable insights much faster than their attempts to integrate non-standard identifiers and datasets. To analyze a company’s performance across ESG factors, for example, investors need to unambiguously identify the entities engaged in activities that, for example, produce greenhouse gas emissions, to be able to analyze and understand the climate-related impact.
The identification of legal entities in a unique and unambiguous manner is crucial to identify (i) physical risk, (ii) transition risk and (iii) liability risk. This was underlined in the Network for Greening Financial System (NGFS) Progress Report, authored by a network of 83 central banks and financial supervisors, which highlights that a major obstacle to accessing and making use of existing climate-related data is the lack of unique identifiers which are crucial for interlinking climate-related data and financial data. The LEI can help support this initiative by linking financial and non-financial information. When legal entities, such as investment funds and government entities, together with corporate events, are defined and tracked using different identifiers, it can be extremely challenging for investors and/or regulators to analyze the ESG performance for a given entity over time as each tracker needs to be reconciled and mapped back to the underlying entity.
Leveraging the LEI can help to assess counterparty activites, emissions and the resulting risks along the value chains across countries and aggregated data. Being able to identify the activities of their counterparties unambiguously and persistently also will enable companies to analyze and assess their progress toward their committed climate-related and environmental targets.
The LEI will enable cross-border coordination and cooperation as authorities develop modalities, datasets and reporting frameworks to exchange with each other given the global nature of climate-related risks. With the LEI, supervisory authorities can identify financial institutions’ exposure to economic activities impacted by transition risk. The LEI can also provide detail regarding the geographical location of financial institutions’ exposures most prone to physical risk. Moreover, the LEI can facilitate data collection of financial institutions with regards to counterparties/borrowers. The Financial Stability Board (FSB) recommends adding the LEI of financial institutions’ counterparties in data reporting templates to help increase the reliability of climate-related data used and reported by financial institutions.
The European System Risk Board in its recommendation highlighted that the LEI can support the data collection on sustainable finance. “A central harmonised database of relevant information on each company’s degree of sustainability and its exposures to climate risks would be beneficial for supporting the development of sustainable finance and ensuring investor protection by enabling easy access to the financial and environmental, social and governance (ESG) metrics describing the company. Such data would enable supply chains to be tracked (e.g. through the LEIs of suppliers and clients of companies). This would make it possible to estimate emissions across entire supply chains. In turn, it would help monitor the use of the proceeds of green bonds, make green labels more reliable and thus lower the reputational risk of “greenwashing” in green bonds markets.”
The LEI is already required, where available, under the final EU Regulatory Technical Standards (RTS) under the Sustainable Finance Disclosure Regulation (SFDR) . In China, the LEI is required based on the Guidelines for Environmental Information Disclosure of Financial Institutions in Shenzhen.
Some data vendors have already incorporated the LEI into their databases. For example, ESGi, a provider of trusted ESG data for the investment industry, has embedded LEIs into its platform, taking advantage of the International Securities Identification Number (ISIN) to LEI link initiated by GLEIF and helping buy-side firms identify which companies products are exposed to.
In December 2022, GLEIF joined the Net Zero initiative. The value of the LEI has been immediately recognized, given the lack of a mandated, global common identifier in the corporate world creates many challenges to linking company records solely on non-standardized, country-specific ID’s or cumbersome textual data. Truman Semans, CEO and Founder of OS-Climate, said “In the context of our initiative, matching data using GLEIF’s LEI and other open datasets is a key element in building high quality analytics systems that assess companies' progress relative to their commitments to Net Zero and other climate-aligned investment goals.” Alongside this work GLEIF is the co-champion of the ‘discoverable data’ subgroup for The Carbon Call, helping promote transparency in sustainability reporting to support The Carbon Call roadmap released at COP27.
The value of the LEI in supporting the G20’s sustainability agenda has recently been recognized in a report published by leading global business community influencers (the B20, Business in OECD and IoE). The LEI is recognized for its capacity to reduce costs and fragmented approaches across borders for the business community and help set the stage for better risk management information in the future.