The EU’s Sustainable Finance Disclosure Regulation (SFDR) comes into force next week, but the EDHEC Infrastructure Institute (EDHECinfra) has warned that existing ESG reporting schemes for infrastructure investors could fall short of its requirements.
A report published this week argues that existing schemes are primarily designed to assess impacts and are not focused on measuring financial risks.
On 10 March, SFDR will usher in a set of rules for infrastructure fund managers marketing to EU investors, starting with basic requirements.
“Beyond assessing impacts, which ESG reporting schemes currently focus on, prudential rules like SFDR will soon require integrating ESG-related financial risks”, said Frederic Blanc-Brude, the director of EDHECinfra.
The authors of the report, Towards a Scientific Approach to ESG for Infrastructure, reviewed 17 existing ESG reporting and assessment schemes used by infrastructure investors to determine to what extent they can help answer financial questions.
Nishtha Manocha, senior research engineer at EDHECinfra, who co-authored the report with Blanc-Brude, said: “These schemes have created a rich set of indicators [which] are useful to evaluate ESG objectives including impacts but are not a system of knowledge designed to answer financial questions, including how ESG impacts can create risks.”
The authors found that the 17 infrastructure ESG schemes exhibited considerable scope divergence (including the definition of infrastructure and ESG), measurement bias (including a tendency to use mostly qualitative measures), process and input indicator bias (as opposed to actual impact or risk measures) and a bias towards measuring impacts (88% of all disclosures) and much less the risks to which infrastructure companies are exposed.
The paper also predicts a “rapid consolidation” of ESG schemes for infrastructure because of the “combined urgency” of climate change and regulatory initiatives like SFDR.
EDHECinfra proposes steps to develop science-based ESG reporting, including a taxonomy of the ESG risks and impacts of infrastructure companies, and materiality profiles for each type of infrastructure asset using objective, consensual, measurements that can be documented using artificial intelligence.
“A growing number of investors pursue ESG objectives to improve environmental and social outcomes directly”, Blanc-Brude said. “And while this is important, ESG also remains a risk-management and asset-pricing question beyond the addition of constraints to the investments universe.”
Anne-Christine Champion, co-head of Natixis’ Corporate Investment Banking, said: “It was of the utmost importance to thoroughly document what exists on the market and analyse its strengths and weaknesses prior to designing new tools or approaches.”
She added: “This first publication robustly lays the foundations for the next phases of our research partnership, which is increasingly relevant and timely considering the regulatory agenda and momentum around recovery plans and build back better efforts across the world.”
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