Market participants, standard setters, regulators and supervisory authorities might have different views on how to best set up a sustainability reporting framework – and that is different across jurisdictions.
Some critics say the focus should be just on a few important areas and metrics and provide clear rules and guidance how to perform measurement, calculations and reporting.
The list of PAIs (Principle Adverse Impact) indicators (SFDR) cover a range of different areas. In many of them there is a serious lack of data.
Climate data is often mentioned as the most important area when market participants recommend to focus on environmental themes first. But even here it is not so easy to find clear definitions, rules and guidance.
In connection with the most recent discussions at ISSB, the Exposure Draft IFRS Climate-related Disclosures (S2), the Exposure Draft of ESRS E1 Climate Change and the Final Report on draft Regulatory Technical Standards developed by the European Supervisory Authorities a number of challenges and questions can be listed:
- Is it better to require disclosure in any case – even if it doesn’t apply or is not material. Or should regulators only require disclosure when it is material? What is the purpose of the rule itself. Would transparency increase if disclosures were required? This was discussed at ISSB board level in connection with CO2 emission intensity.
- Should the regulator or standard setter provide exact definitions and formulas how to calculate (for example CO2 emissions intensitiy) – in particular if disclosure as such is not mandatory? What should be the numerator and what should be the denominator (revenue, capex?)?
- The use of CO2e instead of disaggregated data on different GHG emissions is also a challenge for investors and analysts when assessing the risk of a company.
- The inclusion of Scope 3 disclosures as an important information for investors given the costs and efforts it will require on the side of investee companies.
- Much has been talked about the fact that ESG data providers use estimates instead of real primary data from investee companies. Should companies themselves be allowed to incorporate the use of estimates also (according to ISSB)?
- Based on which formula should companies and investors calculate GHG emissions exposure? Which dates and intervals will be relevant? The ESAs suggest at least to consider annual emissions data and quarterly holdings data to calculate the quarterly emissions exposure? This is important in case of increasing or decreasing % holding sizes over the course of a year. Emissions exposure should be based on the % holding in the investee company.
- Based on the principle of “You can only manage what you can measure” a detailed disclosure framework would support efficient management and improvement (reduction of emissions, risk, etc.).
Standard setters and regulators will take different routes going forward and market participants will have to adjust their processes. One additional challenge is the fact that all these disclosures have to be made on the basis of a solid IT infrastructure and database model (see also: “How many IT tools will you need?”).
In all cases of disclosure the question of “materiality” is important – and open for interpretation from all perspectives.
Even with solid standards developed by ISSB, EFRAG and other standard setters – combined with assurance services – the ESG data landscape will stay very dynamic and contribute to market inefficiency which should represent an advantage for active asset managers with research capacities and experience in sustainability.
| All opinions expressed are those of the author and/or quoted sources. investESG.eu is an independent and neutral platform dedicated to generating debate around ESG investing topics.
