A survey of ESG data vendors shows data for complying with EU sustainability rules is “patchy” and challenges are likely to persist for some time, says Patrick Rooney, senior regulatory affairs manager at Irish Funds.
The EU’s Action Plan on Sustainable Finance is leading the way in developing a regulatory framework to increase transparency on sustainability, embed ESG risk management and create a framework for sustainable investment. The ultimate goal is to reorient capital flows towards sustainable economic activities, while protecting investors from potential greenwashing. In achieving this, access to reliable, consistent and comparable ESG data will be critical for investors and asset managers.
However, ESG data challenges are likely to persist for some time, as borne out in the findings of an Irish Funds study on the availability of ESG data for reporting under the EU’s Sustainable Finance Disclosure Regulation (SFDR). Addressing these data challenges must be an imperative, as sustainability reporting is the bedrock upon which any sustainable finance regime is built.
The next significant milestone in the implementation of the SFDR is the application of the detailed Regulatory Technical Standards (RTS) by July 1, 2022. Among other obligations, the RTS set out prescriptive requirements for the reporting of negative effects on sustainability, known as Principal Adverse Impacts (PAI), captured by various PAI indicators that are reported annually. This reporting will be a very significant undertaking for asset managers that are in scope (or opt into compliance) and much needs to be done to prepare. Most fund managers will likely use ESG data vendors to source data and this will be a costly exercise, requiring extensive due diligence.
In order to provide some clarity for asset managers on the reality of preparing for PAI reporting, Irish Funds conducted a survey of ESG data vendors. Nine ESG data vendors responded to the research request, covering a range of vendors in both the traditional and alternatives spaces. The data was reviewed for coverage, variance and comparability. The data analysed refers to vendor data available up to May 2021. The findings reveal patchy coverage on several PAI indicators and a wide range of variance in the reported data with low levels of comparability.
Data was found to be generally available for only eight of the 14 mandatory PAI relating to investee companies and that data can vary considerably between data vendors. There was good coverage on the greenhouse gas (GHG) emissions, carbon footprint, carbon intensity and board diversity. However, across these indicators there was a wide variance in the data provided.
For biodiversity, water emissions, hazardous waste and gender pay gap, there was limited information reported. In some cases, only three companies in the sample portfolio were covered. For the indicators applicable to investments in sovereigns and supranationals, data was only provided by four data vendors and the range of information varied across all vendors.
For a number of the indicators, there is wide variance between the data points being used by the various vendors to meet the specifications of the PAI indicators. This wide variance could impact on the creditability of the data reported. For example, for scope 1 GHG emissions, the range of data provided showed differences of between 10% and 50% for the same issuer. For scope 2 GHG emissions, reported data differences were greater than 50% while the same was true for GHG intensity.
In comparing the data, our study found that some data differed in terms of value and some in terms of units of measurement. One key factor for value differences is the timeliness of the data provided for the sample portfolio. Some data vendors provided data for companies for 2019 and some for 2020. Thus, depending on the data vendor that an asset manager uses, there could be a significant difference in the reporting of some of the PAI indicators for funds with similar portfolios.
The timeliness of data updates will be a challenge, as in most cases the data will be based on the previous financial year. For a number of indicators, there are different metrics used by the data vendors. As a result, only a subset of PAI data points were fully comparable.
Addressing these challenges
In light of the significant data challenges that currently exist, managers seeking to comply with the PAI reporting requirements will need to employ a best-efforts approach. While this study related to the reporting of PAI indicators, reporting on taxonomy alignment is likely to be even more challenging.
Irish Funds sought to undertake a similar survey of ESG data vendors in respect of EU taxonomy reporting – but vendors responded that they were not yet in a position to provide reporting on taxonomy alignment. The data required from underlying investee companies in order to perform the calculation necessary to disclose taxonomy alignment will not be available for January 1, 2022, when the EU taxonomy starts to apply.
Even the subset of investee companies in scope of the relevant taxonomy reporting requirements are not required to provide this information until January 1, 2023, while the technical screening criteria are not yet finalised and the related RTS have been deferred in their application to July 1, 2022.
Guidance from regulators on how to address these sequencing and data challenges would be welcomed until such time as data becomes more readily available, particular under the EU’s Corporate Sustainability Reporting Directive (CSRD).
The results of our survey illustrate that the lack of common sustainability reporting standards for companies hinders the comparability and creditability of the reported data. The proposal on CSRD published in April 2021 extends the scope and content of sustainability-related reporting obligations of certain EU companies. The development of a European Single Access Point should also help increase the availability of reliable ESG data.
However, significant data challenges will remain for asset managers investing in non-EU companies as well as for EU companies that do not fall within the scope of the CSRD. Therefore, international efforts that foster convergence in sustainability reporting and open access to ESG data are essential to underpin sustainable finance.
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