Of Divergence and Data

Dr Anthony Kirby, Wealth and Asset Management Consulting Regulatory Intelligence Lead at EY, details asset owners’ varying priorities, as well as the sustainability data and assurance gaps they face.

For the past 15 years, Dr Anthony Kirby, Wealth and Asset Management Consulting Regulatory Intelligence Lead at Big Four accountancy firm EY, has been conducting surveys with Chief Risk Officers (CROs) and Chief Compliance Officers (CCOs) stationed at various asset owners.  

Through these surveys, Kirby aims to identify and understand key strategic sustainability risks within four main areas: regulatory, finance, operations and technology. These four quadrants, he says, cover a wide range of aspects that are crucial for comprehensive ESG risk assessment. 

Kirby tells ESG Investor how research conducted by EY focuses on various drivers that ultimately influence sustainable investment decision-making. These drivers encompass factors like stewardship, commitment to responsible investing, ESG considerations, climate change mitigation and adaptation, proxy voting, social responsibility, fiduciary duty, partnerships, corporate governance, risk assessment, and related metrics.  

In terms of how and what drivers are prioritised, Kirby’s latest research revealed that pension funds’ priorities differ somewhat to other asset owners such as sovereign wealth funds (SWFs) and insurers.  

“For pension funds, stewardship and fiduciary duty are of paramount importance, along with responsible investing approaches, proxy voting procedures, ESG integration, and partnerships,” he says, noting that he was surprised to see several SWFs demonstrating a somewhat different set of priorities, with heavier emphasis on benchmarking against the UN’s 17 Sustainable Development Goals (SDGs), particularly those associated with climate change (SDG 13), biodiversity (SDG 14 and 15), and social issues (SDGs 5 and 10). 

“SWFs’ priorities vary by geography, but overall, they are keen to see evidence from their teams and their managers around sustainability in action. They are saying: show me your approach; show me your partnerships; show me your net zero commitments,” he says.  

Switching to focus to insurers, their primary concern, perhaps unsurprisingly is risk metrics, backed by quantifiable data, according to Kirby’s research. In fact, insurers demand concrete numbers in areas such as risk assessment, global commitment, corporate governance, and key risk indicators.  

“They also value the Task Force on Climate-related Financial Disclosures (TCFD) framework, which guides their approach to climate risk disclosure,” notes Kirby.  

In the insurance sector, the demand for practical case studies is pronounced, as well as a focus on vendors used for assessments.  

“This is in stark contrast to pension funds and SWFs, which generally do not always require such a detailed level of granularity in their risk assessments,” he says. 

“Overall, the priorities and demands vary significantly among these groups of asset owners, reflecting their unique perspectives and objectives.”  

Divergent drivers 

According to Kirby, in the case of pension funds, their heavy focus on regulatory compliance is driven by a few key factors.  

For instance, in the UK, pension funds have demonstrated a “strong alignment” with guidance provided by the Department of Work and Pensions (DWP) on how trustees should evaluate climate-related risks and opportunities.  

The DWP guidance, which was last updated on 23 September 2022, introduced recommendations that emphasise TCFD alignment, and trustees’ minimal legal requirements. 

“It’s almost like the DWP is the examiner for certain pension funds,” he says, noting that the work of The Pensions Regulator (TPR) has helped further reinforce regulatory expectations with the introduction of its dashboard, requiring pension funds, especially those with over 100 members, to publish statements of investment principles (SIPs), which highlight financial materiality considerations. 

“The regulatory environment, therefore, is a significant driver for pension funds to prioritise stewardship and fiduciary duties, with ongoing discussions taking place in the UK around how fiduciary duty should be clarified and aligned with sustainability expectations,” says Kirby.  

Turning to insurers, Kirby notes that their unique characteristics and position within the investment landscape shapes and determines their risk management priorities, with many of them owning asset management arms, adding complexity to their ESG considerations.  

“[Insurers] focus on medium- to long-term outlooks due to the potential impact of weather events on their assets,” he says, adding that this “business-driven perspective” aligns with insurers’ interests in maintaining their bottom line.  

Insurers’ approaches to sustainable investing are also particularly attuned to the concept of prudential risk, says Kirby, which is the consideration of solvency and capital adequacy in the face of potential risks.  

Kirby notes that while this focus is different from the conduct-driven regulatory concerns of pension funds, it underscores the financial implications of climate change for insurers’ stability. 

For SWFs, their approach to sustainability varies depending on the specific entity and its geopolitical context. 

“Unlike pension funds and insurers, [SWFs] face a mixed regulatory landscape,” he says, noting that the level of regulatory influence might differ across jurisdictions.  

“This gives them more room to pursue their own strategic goals in sustainability,” he says, with SWFs often drawn to mapping objectives to SDGs and high-level responsible investment commitments, which align with their broader international objectives.  

However, the politicised nature of their operations can further shape their approach to sustainability, says Kirby.  

“In essence, the differences in approach among these three groups are driven by a combination of regulatory pressures, business priorities, and geopolitical considerations,” he says. “This complex interplay highlights the intricate challenges and opportunities in integrating sustainability into various financial sectors.” 

Data gaps 

On 26 June, the International Sustainability Standards Board (ISSB) published its long-awaited standards on sustainability and climate disclosures. The goal of the standard is to establish a common global baseline for sustainability reporting, with them consolidating and building on several existing frameworks such as the TCFD and the Sustainability Accounting Standards Board (SASB). 

The ISSB standards are expected to sit at the heart of investors’ approach to green finance by providing comparable and consistent sustainability data to inform capital allocation.   

According to Kirby, there is a “general assumption” that the right sustainability data is readily available, at least for developed segments such as climate change mitigation and adaptation.  

“It seems that corporations are well-versed in compiling standard financial data, encompassing elements like turnover, capital and operational expenditure,” he says, noting that data is typically categorised into the 70-odd Nomenclature of Economic Activities (NACE) segments. 

However, a key question remains unanswered: “Is there any assurance mechanism in place for this data compilation process at the corporate level? Is there oversight in supervising it? Are there regulatory checks confirming that non-financial corporations have indeed gathered data accurately?”  

The answer is not yet. 

This raises concerns, says Kirby, about what happens when a corporation fails to accurately compile its sustainability data according to industry-accepted standards such as NACE codes.  

In such cases, what’s the position of vendors who transmit this data? Who bears the liability if inaccuracies occur? 

According to Kirby, such questions lead to discussions about reliance on vendors and the trust placed in their capabilities. Further, if firms along the value chain aren’t assuming liability for this data the question of accountability remains.  

“If data inaccuracies lead to issues, , the question for regulators will be: who is on the hook to take responsibility?”  

Kirby also stresses that the issue of data availability remains a major concern for certain sectors, such as product disposal costs or data associated with a circular economy.

To illustrate, the point, he poses a straightforward case – embedded Scope 3 emissions across the value chain which include greenhouse gas (GHG) emissions both upstream and downstream.  

“Notably, certain areas such as capital goods, business travel, and employee commuting tend to feature relatively accessible data on the upstream side,” he says, noting that several though not all downstream investments are also reasonably managed.  

However, he notes that there are specific categories where data might be notably lacking. For example, data might be scarce for aspects like waste generated during operations or the processing that occurs at the end of a product’s lifecycle.  

“The regulatory response to this disparity remains uncertain,” he says. “Among the 15 total categories of Scope 3 emissions, at least four or five categories might have data that inspires confidence in the industry, but an equivalent number will likely be lacking.”  

Bringing all stakeholders together to reach a consensus on how to address this matter, however, is a complex process that is unlikely to occur swiftly, he says.  

“Regulators need to increase transparency in their approach to handling data gaps,” he says, noting that they will need to address questions like whether proxy data or internally derived data should be utilised.  

“A significant concern arises when relying on a single source of data, whether it’s from a specific vendor or an internal model,” he says. “This creates substantial exposure and potential for liability if the data source proves to be inaccurate, e.g. stemming from a corporate mis-reporting data at source.”

Another key consideration, says Kirby, is the issue of unintentional consequences.  

“Finding the precise term for this situation can be a challenge, but the concept revolves around scenarios where organisations didn’t intend to mislead others, yet the data they considered reliable turned out to be flawed, he says.  

“In this context, the discussion extends beyond concerns about greenwashing to encompass unintentional misrepresentation due to unreliable data.” 

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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