Data-driven standards – the key to fuelling investment in sustainability
With varying standards, a diverse vocabulary and shifting targets, it can be difficult for businesses and investors to navigate and understand sustainability performance. Robust data and defined metrics are needed to support investment and the journey to a more sustainable future.
When it comes to standardising terms around sustainability, data really is at the heart of the matter. With a growing list of acronyms and metrics, companies can understandably find it difficult to identify and collate the key information they need to provide, yet financial services companies desperately need good underlying data on which to base their decisions.
It underpins the need to find and agree upon common standards for corporate reporting. This would enable companies to more easily demonstrate their progress towards meeting the Environmental, Social and Governance (ESG) criteria they are following, allowing them to review challenges or identify opportunities.
But it would also, importantly, place financial services providers in a much better position to understand the data and compare that company’s actions and progress with others in similar industries or of a similar size. That in turn, would make lending or investment decisions clearer cut and help to build trusted relationships based on transparency.
Lack of uniformity
The problem to date has been the lack of uniformity. Even the term ‘sustainable’ is open to interpretation and is defined in very different ways by customers, companies, the financial sector and politicians. It has led to the unfortunate situation where the information that companies provide is often so varied that fund managers find it difficult to make reasonable assessments of companies’ sustainability efforts, and private investors completely lose track.
This, in turn, inhibits the flow of money from the private sector into efforts to create a sustainable economy in the EU.
Since as far back as 2017, large corporates, credit institutions and insurers in the EU have been obliged to report on non-financial matters under the Directive on Corporate Social Responsibility (CSR). However, investors have criticised the relevance of the information reported.
“We’re still a long way away from measurable and uniform key figures,” says Sabine Fischer of BB Alternative Partners. This Cologne-based financial-services provider supports institutional investors, foundations and family offices in allocating and managing alternative investments, including as regards regulatory measures. “So far,” she adds, “there hasn’t been a lot of actionable information in these reports.”
And, she points out, even the ratings agencies are struggling to check the facts, with some of them resorting to sending questionnaires to the companies, for example. Although this in itself is contentious. Asset Management company NN Investment Partners found that, as big companies with specialised teams find it far easier to answer the questions than small ones, they, on average, receive better sustainability ratings.
When it comes to standardisation, technology offers a number of possible solutions. One is using blockchain technology to measure and monitor the data. The technology essentially consists of a chain in which data is aligned at any specific point in time, with the added benefit that third parties cannot change it retrospectively.
By using blockchain technology, for example, to build products that measure data from photovoltaic panels and directly store that data, companies could clearly verify the credibility of their electricity consumption figures.
AI-supported programs could also be used to capture data. For companies seeking to calculate CO2 emissions, for instance. Many typically use CO2 emission averages to calculate their scope one and two carbon footprint, but AI can offer greater precision. With the appropriate software, a company can also take into consideration the fact that CO2 emissions resulting from electricity consumption differ from country to country, depending on the energy mix in question. The German Bundesliga football team, Werder Bremen, for example, uses a start-up that provides software that helps them establish their own CO2 emissions more precisely, and subsequently helps them identify ways to reduce them.
Bearing in mind the urgency of taking action on sustainability and tackling the risks climate change presents, in April 2021 the EU Commission proposed new regulations on the corporate reporting of sustainability, bringing it in line with the rigour expected from a company’s financial reporting and broadening the scope of companies required to participate.
It means that, with the exception of very small companies, all companies listed on a capital market in the EU, as well as large unlisted companies, will be required to provide information on sustainability matters.
"Today's new rules are a game changer in finance," says the European Commissioner for Financial Stability, Financial Services and the Capital Markets Union, Mairead McGuinness, about the newly agreed package of measures in April. "We are stepping up our sustainable finance ambition to help make Europe the first climate-neutral continent by 2050. Now is the time to put words into action and invest in a sustainable way.”
The EU would also like to replace the current patchwork of reporting standards. In future, companies will have to publish the comprehensive sustainability-related information necessary for a fuller understanding of business performance, the business situation and results, as well as being required to disclose information about their impact on society.
“A largely qualitative sustainability report, just a few pages long, will no longer be in line with the regulations,” says Nicolette Behncke, Partner and Expert in Sustainability Reporting and Assurance at PwC Germany.
The precise standards are to be drawn up by the European Financial Reporting Advisory Group (EFRAG). Until finalised, companies must continue to apply the major standards, such as the GRI and the standards set by the TCFD and the SASB. Globally, the GRI is the most frequently used standard for sustainability reporting, while those set by the SASB are in turn used by the big financial institutions, and the TCFD concerns itself with the volume of CO2 companies currently produce.
The new normal
There would appear to be a long way to go before a uniform standard and widespread utilisation of blockchain technology is achieved. In the meantime, financial services providers, companies and private investors have little choice but to define their own sustainability standards.
To this end, Sabine Fischer of BB Alternative Partners has developed an ESG scoring model, which aims to classify how well managers of private equity funds and private debt funds adhere to sustainability criteria.
“Just two years ago, sustainability standards for private equity fund managers tended to be something for idealists,” she says. “Nowadays most of them apply these standards – it is all changing.”
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