Important Agenda with uncertain and incomplete data
By Søren Rahbek, Director | ESG Specialist | The 14th of March 2023
The reporting season has started, and it is now possible to take an early measure of the status of ESG reporting.
A bit of context here: financial institutions and providers of financial investment products such as investment funds or portfolio management solutions are required under EU’s Sustainable Finance Disclosures Regulation (SFDR) to report on several KPIs (called Principal Adverse Impact indicators or PAIs) highlighting the ESG impact of the investments made. The investments are made into the shares and debt issues of companies and countries, which should now deliver the data needed. It is the companies and governments which can take direct action to decide and implement strategies to impact issues such as CO2 emissions, hazardous waste, or gender pay differences. And surely, it is in everybody’s interest that data on PAIs performance is made available as soon as possible.
To be fair, financial institutions have until 30.6 to publish their first institution-level report, but at an investment product level, reporting has to be made for q4 2022. That means that data should already be available.
During the autumn of 2022, REGTECH DATAHUB analyzed PAI data available from the largest Listed Danish companies. We looked at what was reported on the 14 primary and mandatory PAIs. Only 44% were reported.
This means that: A. The most important clients of financial institutions do not report the data necessary for financial institutions to be compliant and: B. if data on all 14 PAIs are anyway reported by financial institutions, the quality of these data must be questionable. Who did the estimates?
This opens up a risk of involuntary Greenwashing (pretending to be greener than reality supports): in an attempt to fill the gaps in the reporting, financial institutions rely on estimates either in-house or from data providers that might (and indeed often seems to) differ quite substantially from the reality defined when issuers start reporting themselves.
But surely, this year will be different? Well. Judging by the reports we have seen so far; data have improved but are not there yet. This is probably a reflection that companies are not all fully required to report on all PAIs and that finding and aggregating the data for the annual report are still new processes.
But important issues appear. One major observation has been that the shipping giant AP Møller-Mærsk has released a sustainability report, that reflects the implementation of a new model for CO2 emission calculations. This has (very admirably) led AP Møller-Mærsk to recalculate their emissions for 2021, which of course makes comparisons more relevant.
The recalculations led to an increase in reported CO2 emissions for 2021 of 17%. This would in itself be noteworthy but becomes critical as the increase also corresponds to more than 40% of the total estimated CO2 emissions of Denmark as a country!
This is a massive number and change – and while it is a recommendable approach to improve both models and reporting, quite a few financial institutions believed in and reported based on last year’s numbers.
Another factor that makes a comparison to 2021 difficult is that more and more companies will do the “honorable thing” and report on the so-called scope 3 emissions which are emissions resulting from the use of the company’s products.
For a cement factory producer such as FL Smidth, this means that the CO2 emissions and thus the footprint and intensity PAIs, increase by a factor of 9,000 compared to reporting based on scopes 1 and 2, meaning the direct CO2 emissions and the indirect CO2 emissions from the use of electricity, etc., as scope 3 emissions include emissions from the operation of the cement factories provided by FL Smidth worldwide.
A final concern is that it is somewhat disappointing to read “brand new” reports on corruption or other governance factors (the G of ESG) and then realize that data is from 2019 or even older.
So, the reporting made this year will be very difficult to use for any major decisions and grand statements on ambitions and strategies must be made with extreme care. All market participants, investors, and financial institutions should focus on the dialogue and on getting actions agreed upon and implemented rather than seeking to estimate ESG and SDG factors with multiple digits after the decimal point. ESG data collection is not an exact science – yet.
REGTECH DATAHUB will contribute to the world of ESG data by providing only reported data. We will also commit to sourcing available public data on the ESG performance of governments and urge NGOs and governments to be quick in updating the relevant reporting. We will recommend users of data and providers of reports be honest about deficiencies in data and be open about the challenges this represents.
On our side, we will aim to bring together all relevant data for securities trading and regulatory reporting including ESG performance in a common structure, making access to data easily, without creating limitations on the use.
Our name, Capital Market Partners, reflects what we define as our core service: Business understanding based on extensive experience in applying technology in the capital market area.
As a business partner, we offer consulting services based on our combination of business understanding and IT know-how. Our work analyzes, implementation of IT systems and other projects supports strategic decisions at different levels in complex business contexts.
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