Attracting investments by intelligent sustainability reporting – Clues from the Eurosif survey
Eurosif, a leading pan-European association promoting sustainable finance, recently published a detailed report that explains the challenges faced by investors who use the corporate sustainability performance information to take investment decisions. The key takeaways from this report can be summarized into three buckets as follows:
- Quality of data: Study participants stressed the importance of diverse data for informed investment decisions, particularly regarding climate risks and impacts. They endorse the double materiality approach in the ESRS(European Sustainability Reporting Standard), which considers ESG factors affecting the financial performance of a firm and the impacts of a firm’s operations on the people and the environment around it. (Read our articles on double materiality here).
- Quantity of data: Participants expressed the need for comprehensive climate-related information that encompasses not only companies’ own operations but also their value chains. They believe that the current level of ambition for the ESRS should be maintained, including standardized reporting on Scope 3 emissions. (More about scope emissions here, here and here).
- Forward-looking statements aiding investing decisions: Investors seek forward-looking information that includes climate-related targets, risks, opportunities, and transition plans which would enable them to assess better companies’ alignment with global climate goals and their preparedness for the transition to a low-carbon economy.
A comprehensive analysis of these investors’ requirements can be read in Part 1 of this series here. In this part, we analyze how these insights can be intelligently applied by firms getting ready to report their corporate sustainability performance(CSP) in accordance with the EU CSRD regulations.
Why do investors require Corporate Sustainability Performance(CSP) data?
A significant challenge often cited by investors is the insufficient availability of data required to meet EU regulations, including SFDR PAI (Principal Adverse Impact) Indicators or EU Taxonomy alignment. Several participants of the Eurosif study noted that they presently utilize SFDR-related data solely for the purpose of compliance, without regarding it as valuable information for investment decision-making.
As explained in some of our previous blogs, the essence of the EU Sustainable Finance Framework is to channel private investments toward sustainable projects, and the framework includes the EU Taxonomy Regulation (read here) for corporates and investors, Sustainable Finance Disclosure Regulation (SFDR)(read here) for investors and Corporate Sustainability Reporting Directive (CSRD)(read here) for corporates. These Regulations cover all the key players in the entire value chain of investments, like corporates who seek capital, investors who provide money to these firms, and everyone in between.
The key to the efficient allocation of capital to sustainable projects is “information”. The EU Taxonomy defines what activities are environmentally sustainable, while the CSRD mandates reporting of the sustainability performance of corporates. The SFDR provides guidelines for market participants on labeling their financial products based on the EU Taxonomy. The MiFID II and IDD provide guidelines for financial advisers to integrate this information and act according to the sustainability preferences of their clients. Essentially, the data originates from the corporates and transmits through the market participants and advisers to the end investor.
A simplified version of the information and capital flow across the entire value chain and the applicable regulations and a simplified version of the data flow are given below.