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Commentary

Climate Data in the Investment Process

Despite imperfections, investors should not wait for regulation to offer more comprehensive solutions, says David von Eiff, Director of Global Industry Standards at the CFA Institute.

Climate change impacts, through direct and indirect channels, present us with tremendous economic risks and opportunities. While their complexity makes estimation difficult, cost estimates are generally staggering. A 2022 analysis by Deloitte projected that an increase in global warming to 3C could lead to global economic losses of US$178 trillion over the next 50 years. However, the study estimates that US$43 trillion of economic gains could be realised through a successful transition to a low-carbon economy in the same time frame.

Governments worldwide have begun adopting policies and regulations to fund the transition to net zero economies and address climate-related risks. Further, companies have begun evaluating physical and transition liabilities and opportunities. Banks and insurers are altering their businesses to address better climate change-related liability risk in their lending and underwriting decisions. Asset owners are seeking to understand how climate change may affect the value of their assets, and asset managers are increasingly analysing their investments’ climate risks and opportunities.

This increasing focus on climate-related risks and opportunities has highlighted the significance of having accessible, reliable, climate-related data to measure and analyse, which is key to understanding and effectively utilising climate data as a component of investment strategies.

Applications of climate-related data

Climate-related data are integral to investment processes, serving purposes such as risk assessment, asset valuation, and shareholder engagement. It is collected, analysed, and used not only by asset managers or lenders but also by the ecosystem that provides services to them:

  • Credit rating agencies, which incorporate climate risk exposure into creditratings;
  • Index providers, which provide climate-themed indexes and often calculate climate-related metrics for conventionalindexes;
  • Valuation service providers, which may incorporate climate considerations when valuing privateassets;
  • ESG rating providers, which often incorporate climate-related data and opinions in their ESG ratings andscores;
  • Sell-side research providers, some of which are integrating climate-related information into theiranalyses; and
  • Climate-related data and research providers, which produce a wide range of company and sector-specific climate-related information, as well as a comprehensive range of market research, market intelligence, and thought leadership on climate-related

In 2022, PwC found that the data used as inputs for climate analysis as well as the level of incorporation differed significantly between service providers. This variability, coupled with limited transparency, makes comparisons difficult.

Challenges in accessing climate-related data

Market participants have access to climate-related information from multiple sources, ranging from company disclosures to datasets and publications from NGOs, governments, industry organisations, and third-party data vendors. However, obtaining comprehensive, reliable, and comparable climate-related data is challenging because many jurisdictions lack climate-related disclosure obligations.

Climate-related data typically can be accessed in three primary forms: raw, processed, and analysed. Each of these forms comes with different challenges:

  • Raw data are directly disclosed by companies themselves such as through regulatory filings and corporate sustainability reports. A high degree of inconsistency exists in what climate-related information companies disclose; how companies define,measureand calculate climate data and metrics; and even the timing of the disclosures, which vary according to fiscal years among companies.
  • Processed dataare data that are estimated, interpolated, or modelled. They can fill disclosure gaps and provide investors with a more complete set of information to work with. Nonetheless, they come with their own set of challenges, such as limited coverage for smaller companies and those domiciled in emerging markets. In addition, using data providers does not automatically ensure reliable information.
  • Analysed data are data that have been collected, processed, aggregated, and presented as a judgment or an opinion, typically available in the form of ESG company ratings. However, ESG rating agencies may use hundreds of ESG datapoints and metrics in their company analyses to formulate ESG ratings. Research has shown that the differences in ESG ratings for individual companies among providers are substantial.

Regulators are starting to address transparency and comparability concerns surrounding ESG ratings. Some have issued or are in the process of issuing regulations or voluntary codes of conduct for ESG rating agencies and data providers.

In 2022, Japan released its code of conduct for ESG evaluation and data providers, based on six principles: securing quality, developing human resources, managing conflicts of interest, and ensuring independence,  transparency, confidentiality, and communication with companies.

Singapore published its code of donduct in 2023 to establish baseline industry standards for transparency, and both Hong Kong and India are in the process of developing standards.  This reflects a growing recognition of the importance of standardised and reliable climate-related information in investment decision-making.

Navigating climate data disclosures

2023 marked a significant step forward in enhancing climate-related data disclosures. Several regulations, standards, and industry initiatives were introduced, issued, or proposed to enhance the availability, consistency, transparency, and quality of climate-related information.

Mandatory reporting for listed companies in Singapore will begin in 2025. In India, Business Responsibility and Sustainability Reporting mandated climate disclosures for the top 1,000 companies in 2023, while banks will begin disclosing in April 2025 under draft regulations. Hong Kong and Malaysia are also consulting on new sustainability rules for issuers based on the standards of the International Sustainability Standards Board. China’s three major stock markets announced new sustainability reporting guidelines for listed companies, including a new requirement for hundreds of larger cap and dual-listed issuers to begin mandatory disclosure on a broad range of ESG topics in 2026.

However, despite these advancements, consistency and comparability in climate-related data remain a persistent challenge for investors. Comparability is further complicated by the differences in materiality, the audience for the information (i.e., investors or other stakeholders), the location of the information (i.e., annual reports filed with regulators, separate sustainability reports, and filings with other governmental agencies and bodies), the timeline for the adoption of the standards, and the degree to which the information will be verified by external parties, such as auditors.

For now, investors should exercise judgment in utilising available data effectively, while being mindful of its limitations. They should apply the same rigorous data interpretation, checks and management techniques they employ with other incomplete or estimated datasets. Despite the ongoing challenges, investors should not be discouraged from using climate-related data or hold back until regulations and standards start offering more comprehensive solutions.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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