Data is the holy grail for ESG investors. Michele Lacroix, group head of sustainability at SCOR, discusses how the European regulation will bridge the data gap, but highlights the pain for preparers.
What are your thoughts on the European Sustainability Reporting Standards (ESRS)?
Keep in mind that these standards are still in consultation mode, and they are not finalized yet. It's an ambitious set of standards which will require a tremendous amount of work for preparers.
I'm still struggling on how to make sure that the interoperability with International Sustainability Standards Board (ISSB) will be manageable. Because imagine that we have two referentials that are comparable but not aligned, meaning that we have to publish two sets of metrics for pretty much the same concept, one under IFRS and another one under the EU regulation, it will significantly increase the operational risk without any added value.
So that's where I'm still uncomfortable.
If some KPIs were to become optional (obviously the ones that are not related to climate change), we will have to manage commitments versus ability to steer portfolios and deliver: the first set of reports will come out in January 2025 based on 2024 data and comparable with 2023. Then these rules will be reviewed as is customary in the EU every three years, which means 2028 – how does that stack up with our commitment to reverse biodiversity loss by 2030, if we have to wait that much time before we get the data from investees on how they manage biodiversity?
So, on one hand, we can be worried about the reporting burden and complexity, but on the other, it is critical to put in place those shortly to make sure that we will be able to collect the data, host the data, process the data, validate the data, and put it in the accounting systems, on time to meet our sustainability targets and regulatory requirements.
The two sides you describe is the dilemma between the preparers and the users, right?
One does not go without the other, and at SCOR, as a listed company we are preparers, but as investors and insurers we are also users. And that's the reason why we can see regulation from both sides.
But we need this data, and we need to foster transparency, even beyond EU. We have calls at 8pm in the evening with Brazilian companies to engage and get transparent data on deforestation from them, so why should we go against regulation that serves what we're trying to achieve?
I always have the feeling that because nobody really understands the full scope of ESG topics, we ask for a lot more data than what is actually needed. But what it should really come down to is: what do we try to achieve? What is this regulation aiming to do? What do we want to do with all this information? Will this enable us to take more meaningful decisions? Will this enable us to reach net-zero by 2050, to reverse biodiversity loss by 2030, and to achieve the 'just transition'?
Looking at the proposed standards, even if they are still drafts under consultation, they offer an idea on the direction of travel that EFRAG is taking, is that the sort of information that you need as an investor to then make sound decisions?
Yes, absolutely.
But after 6 years of Solvency II regime, I'm still wondering what the regulator is doing with all the data they collect on a quarterly basis. So hopefully the data coming out of ESRS will be used. And we might see some of the KPIs disappear in the future, while at the same time realizing that some of them are missing. Don't forget ESG is a journey and we are all learning by walking.
When developing internal tools and architecture to address this new regulation they should be flexible to address future needs and developments. I really do believe that we will drop or replace some of the metrics that are proposed today, because we will realize that either they are impossible to collect, or finally realize that other bring more value.
However, we first need to use them to know whether they are useful/meaningful It's really computing the data that provides its meaningfulness: you start to understand what it actually means, you start to understand what you can get out of it and how you can use it and only then it becomes a meaningful metric that enables to efficiently steer a portfolio or report on progress.
The same thing happened with greenhouse gas emissions. When we first asked for the carbon footprint of our portfolio, the question was about what we wanted to do with it. My reply was: we don't know exactly yet, but once we have the figures, we will have an understanding of what they tell us about the positioning of the portfolio. And from the initial figures they gave us we worked through, breaking down asset classes, taking out the asset classes where we felt we couldn't take much action, and step by step we ended up with something which was understandable and actionable: Showing the trend after collecting historical data to compare with, and setting decarbonization targets.
All the while you don't manipulate the data you don't know what you can get out of it. And I think that will be the first challenge, it will take us a couple of years before we know how to extract value from all the data and how to use them in an efficient manner to inform good decisions.
I'm assuming, based on previous conversations, that you like the fact that Europe has embraced double materiality, rather than single materiality like the ISSB?
Yes, double materiality is important. We cannot succeed in our journey toward a more sustainable world if we don't care about our impact on Nature, People and the Planet. ESG factors are often early signals of future risks and as such, impacts should be considered as potential early signals of future ESG risks. By definition nobody knows exactly what will be material tomorrow, but if you know that something may happen in the future, you will want to track and monitor it. I'm worried when some say we shouldn't worry about what is unsure... because it has taken so long to get to the point where we set decarbonization targets, so if we bury our heads in the sand again for things like biodiversity... how are we going to achieve our sustainable goals?
And in terms of implementation of the standards, what are the key challenges, beyond complexity and burden?
The issue is we're at the time where artificial intelligence is likely to be needed. Because it's not only about KPIs. Narratives are critical to understand the sustainable journey of a client or an investee. There you have a lot of policies, processes, and qualitative information in different venues. And honestly, I don't know how we will be able to read all these documents and compare them to identify the winners of the transition.
The time has come where we need to be able to include artificial intelligence to help us with this.
The Corporate Sustainability Reporting Directive (CSRD) asks for everything to be machine readable, which is a good thing, but we need to have solutions to read beyond quantitative information.
Until now, ESG data has been very manually processed. We are entering this industrialized phase, where all this information will be much better formulated, standardized, but then I'm not sure that it will be easy to manipulate, use and process, so we need to have systems and solutions to be able to help us to do the job correctly.
At the moment it is a bit of a mess because preparers are wondering how they are going to comply – and with what as nothing is set in stone yet –, and users are questioning how best they can use all this information.
Some have suggested that through technology you can tag disclosures and at the press of button have an ISSB report, an EFRAG report, a SASB report, and so on... basically from the same data point. Is that a fantasy?
I honestly don't know about that, but what I would like to see is mapping tables between what is required by ISSB and by EFRAG. And I would like this mapping table to be signed and approved by both ISSB and EFRAG, that is where we could have the so-called 'interoperability'.
One of my biggest concerns is that within the CSRD they have not selected the Task Force on Climate-Related Financial Disclosures (TCFD) format, and neither has EFRAG, even if EFRAG has provided a mapping table. What would have been the cost of aligning to TCFD? Not that much and it would have simplified so much the way we report.