Green recovery hinges on the right data
26 May 2020 | Markets
EU policymakers are promoting a green recovery. A public-private agency rating companies’ climate performance would help keep it on track, argue Steven Tebbe and Laurent Babikian.
Steven Tebbe is managing director at CDP Europe, an organisation aiming to make environmental reporting and risk management a business norm. Laurent Babikian is director for investor engagement CDP Europe.
EU leaders are clear that the long-term economic response to the coronavirus crisis should use the European Green Deal framework, which targets climate-neutrality by 2050.
This ambition is needed, as our future economic prosperity depends on it. Stimulus packages for companies should include green conditions, such as targets to cut emissions or earmarking capital for low carbon projects. Oxford research says a green recovery offers the best economic returns for public spending.
CEOs from many of Europe’s biggest firms have agreed, joining alliances championing a new, resilient economy. Investors are warning companies not to lose focus on climate action.
These activities need to be well tracked. Funds can be targeted best if companies are transparent and have plans aligned with the EU’s objectives. The EU must act boldly to ensure it can judge companies’ actions according to the criteria it needs.
Growth and consolidation in the ESG data market
Climate goals require markets to massively redirect capital towards lower carbon technologies. Pre-crisis, the EU said its target needed €180 billion per year in extra private investment. The corporate sector must double its low carbon spending, a recent CDP report has estimated.
This existing financing gap, paired with green recovery demand, means that the range of instruments setup for ESG investing must expand. Standardised data is needed for those and the big raters are betting on providing it.
EU policies have done much to develop this market. Though the best quality data is still disclosed voluntarily, reporting is now mandatory for the EU’s 6,000 biggest firms. New regulations to define investments’ greenness and set requirements for labelling low carbon benchmarks and bonds are coming in, and can be used to identify job-boosting low carbon investments during this recovery.
These policies will lead to more sustainable investment, and more pressure on companies to disclose better non-financials.
Ensuring data serves the long-term public interest
There are two reasons to favour public non-financial data. Because it tracks and drives progress to reduce emissions, it should not be rated privately, where methodologies may be less transparent or as aligned with policy objectives.
Second, non-financial risks are complex and unprecedented. Long-term climate risks may not always align with financial risks. The societal benefits of limiting and adapting to global warming might not be rated best by experts in shorter-term financial risk.
This is particularly as EU leaders support companies through this crisis. They must insist on transparency about how companies plan to deliver the low carbon economy the EU wants.
Europe can address this. Last year, a report for the French Ministry of Finance suggested a non-financial standard-setter. The European Commission has now announced it will build on current best-practices and create European standards.
This is supported by those seeing non-financial data as key for faster climate action. But the next step would be for the EU to assure accountability to its long-term targets by scoring data, too. For the data to best serve the public interest, it could setup a public-private environmental rating agency and score companies according to its new standard.
Being public, this can buffer investors from the risk of the ‘issuer-pay’ model being applied to non-financial data, the problems with which were debated during the financial crisis.
Public European institutions have a moment to lead the world by making bold changes to how non-financial data is collected and handled. As it sets out on a green recovery, it must not pass up the opportunity while it exists.