Most climate and ESG data is self-reported – can this approach ever provide investors with the reliable and comparable data they need to make the best investment decisions?
Self-reported data makes up a lion's share of the climate and sustainability information available t investors but is often lacking in transparency and comparability. Data is crucial for investors to make responsible, long-term decisions so if corporate data is inconsistent it could hold back the huge levels of investment needed in sustainable solutions to limit climate change.
Data availability and accessibility also play key roles in triggering innovations that can help transform financial markets to align with global climate goals. EIT Climate KIC's Climate Innovation Summit in Dublin on 6 November saw a group of experts including Andreas Hoepner and Jakob Thoma debate whether self-reporting can ever succeed in providing sufficient information to investors.
Opinion: Self-reporting can be effective
Andreas Hoepner & Fabiola Schneider, University College Dublin
We argue it is possible for self-reporting to be effective and sufficient for investors, but currently less than 2% of companies report 100% of their Scope 1 greenhouse gas emissions. Average disclosure is far below 95%. So, more work needs to be done and we need more accuracy and simplicity in sustainability reporting.
But we think the fact that 20 companies are reporting all their emissions – or providing a quantitative statement of completeness showing how much they are collecting and reporting on if it's not 100% – shows that it is actually possible to provide effective and sufficient data for investors through self-reporting.
The quantitative statement of completeness is important. If a company can collect GHG data for 92% of its revenues it's better for it to say that than pretend it has collected everything. We need quantitative statements of disclosure in percentage terms – this data point is called Percentage of Disclosure or ES074 in Bloomberg's environmental disclosure score – not just text in footnotes. We can't build benchmarks on text only.
Investor demand for more clarity on ESG and sustainability is growing, and this should be a driver for companies to provide this type of clarity on emissions data. For example, we've seen recently the Church of England Pension Fund and Swedish AP7 pension fund challenge some companies they think might not be transparent enough in their sustainability reporting and disclosures of lobbying activities. So investors clearly do care about sustainability reporting and corporations putting their lobbying money where the mouth is.
We need also more education – some companies want to report 100% of their emissions but don't realise how hard it is. There needs to be transparency between company managers and people on the ground collecting sustainability data. Senior executives need to be trained in how hard it is to measure all of your emissions. They should then understand it requires budgets and technical expertise.
Opinion: Self-reporting isn't effective
Jakob Thoma, 2 Degrees Investing Initiative
There are a few issues with self-reporting mechanisms, one being that the data is often presented in a way that's not right for investors. Financial markets are moving into real-time data and big data, but traditional financial reporting channels are quarterly and sustainability reports are often published yearly. If, for example, your sustainability data from the 2017-18 financial year is published in, say, April or May 2019 – how relevant is that information to investors? Since the reports are issued so infrequently, they become static.
Granularity is also an issue. If you think about climate policies, you want to understand, for example, where all the power plants of a company are. If companies only report that global RE investment reached a certain level in the year, it's not the kind of granularity you need as an investor to get an idea of how the company is aligned with regional science-based targets and how it is exposed to regional transition risks.
Another issue is that sustainability reporting in almost all cases revolve around performance indicators such as the number of jobs created or estimated avoided emissions. But everything that's modelled internally won't be comparable across companies. You can just change discount rates and then suddenly you have a different results. None of this will be comparable unless everyone uses the same model, which is very unrealistic to expect. I think it's very unlikely that we'll ever have a market standard or model used by all companies in the world– and indeed it is unclear that from a company management perspective this is even desirable.
I'm not saying you can't draw any information from self-reported sustainability data, of course you can, in the same way you can draw information from an annual report. But self-reporting will play a second fiddle role. I think the data investors need will be made transparent in non-traditional financial reporting channels such as social media, regulatory reports and asset-based data. ESG data providers do some of this work already and this is the type of data that will inform investment decisions.