German investors believe the EU Sustainable Finance Disclosures Regulation (SFDR), paired with further disclosure obligations, will improve transparency of companies’ climate impact activities.
The detailed legal requirements of the SFDR, along with the EU taxonomy, “will certainly lead to improved transparency [on the climate impact] of companies’ activities”, Bastian Grudde, ESG analyst at Union Investment, told IPE.
But only the fulfilment of technical regulatory standards will tell in detail the measure of the progress on the matter, he added.
Earlier this month the European Supervisory Authorities (ESAs) – EBA, EIOPA and ESMA – published draft regulatory technical standards on the content, methodologies and presentation of disclosures under the SFDR.
“Companies, including medium-sized firms, that [conduct] activities with high climate impact will have to provide better and comparable data in the future,” Silke Stremlau, member of the managing board at Hannoversche Kassen, told IPE.
The investment decision-making process will change “due to greater transparency than today, with investors that can clearly see the differences between companies, their climate impact and future ambitions”, she added.
Stremlau believes that further disclosure obligations under the Non-Financial Reporting dDirective and the IORP II directive also contribute to transparency.
Investors, however, should exercise “more pressure” to force companies to report on the risks of climate change, Union’s Grudde said, adding that this applies in particular to revealing the assumptions behind the assessment of climate risks.
He gave the example of so-called Scope 3 emissions companies disclose greenhouse gas (GHG) emissions emitted in the value chain.
“Only 33% of the 250 largest public companies listed in the UK report Scope 3 emissions at all, and only in a few cases the assumptions behind the calculation of these emissions are comprehensible,” he said.
Investors should urge companies to fill in the gaps, but auditors and regulators are accountable for systemic failures in disclosure obligations, Grudde said, adding: “We finally need Paris-aligned accounting.”
Looking for right data
In an analysis published recently credit rating agency Scope found that over three quarters of the 2,000 largest companies by market capitalisation globally do not disclose information on Scope 3 reporting on GHG emissions.
More than two-thirds of the firms researched do not disclose or only reveal incomplete information for Scope 1 and Scope 2 standards set by the GHG Protocol.
The lack of data, Scope said, makes it hard for investors to disclose the adverse impacts of their investments. The SFDR introduces requirements for investor reporting on such impacts.
“The challenge is no longer to receive data on greenhouse gas emissions, but reliable, meaningful data,” Grudde said, adding that most companies are “very cooperative” on disclosing GHG emissions but in many cases don’t take the effects of climate policies and climate change seriously into account.
Hannoversche Kasse researches data using a 60-page “sustainability profile” from rating agency imug, which among other things also examines CO2 emissions and a company’s approach to climate.
Such profiles show that many large companies in the manufacturing sector have been collecting and publishing data on GHG emissions for years, taking part in the Carbon Disclosure Project (CDP), while the pension fund considers investments in bank bonds “problematic”.
“Banks publish little CO2 data and if they do, only Scope 1 and Scope 2 data, which of course turn out to be good for a bank,” Stremlau said.
Banks should reveal loans granted to carbon-intensive industries or investments in oil and coal companies, and should be under Scope 3 reporting, “which does not exist for them yet,” she added.