On Thursday May 25th, Icebreaker One held its first Impact Investing advisory group meeting. Alongside co-chairs Julia Langley, ESG & Sustainability Strategy at State Street and David Carlin, Head of Climate Risk & TCFD at UNEP FI, we welcomed members from across the impact investing ecosystem.
Members included data analysts, specialised data providers, framework developers, assurers, impact investors, research & academia and more. The goal of the advisory group was to produce a long list of use cases centred around the following problem statement:
How to improve the data sharing and infrastructure of company impact data (scopes 1-3), starting with water and energy use, to increase trust and data validation, including by ratings agencies.
Water and Energy
With our problem statement focusing on water and energy use, it was important to be aware that this is an area of disclosure that lags far behind disclosures on GHG emissions. What’s more, finding the clear link between water data in the real economy and linking it back to the financial economy represents a significant challenge. One member of the AG suggested this link could be found by focusing on water pressure, which acts as one key indicator of how water can be linked back to company performance.
Discovering the real financial incentive for organisations to voluntarily disclose this data remains firmly at the centre of the issue. And, while some regulatory requirements exist for reporting water data, such as the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB) or initiatives such as the CDP Water Program, it seems finding the carrot rather than the stick would yield a more satisfying solution. Disclosing this data ultimately comes down to an organisation choosing to be more transparent, demonstrating their commitment to more sustainable practices and therefore building trust with stakeholders and customers.
Scope 3 emissions
As the meeting progressed, the advisory group quickly began to refine its focus, looking to Scope 3 emissions. This is a challenging area, not least because Scope 3 emission disclosures are voluntary and yet are said to account for around 90% of the average company’s emissions, according to the GHG protocol.
Dissecting further, Scope 3 emissions can be separated into upstream and downstream sources, with one AG member noting that upstream sources (emissions stemming from the production of a business’s products or services) may hold more leverage whereas downstream sources (emissions stemming from the use and disposal of these) are more sensitive and fragmented.
More specifically, the methods of acquiring data from downstream sources can be done by looking at spend data, supplier surveys and product life-cycle assessment data, though each method has its own respective drawbacks. ‘Banks for example, use spend based analysis to work out energy use of customers which isn’t a great method as it has a 10% error rate’, noted one member of the AG.
While the voluntary nature of Scope 3 disclosures is set to change, following an announcement from the ISSB in December 2022, those companies already voluntarily disclosing their Scope 3 emissions often appear to have a bigger impact on the planet than those that don’t report on their Scope 3. This, of course, is not an accurate representation of what is really happening.
Therefore, alongside a push to improve the transparency and accuracy of ESG disclosures there also needs to be a shift in attitude or reframing of how we view companies Scope 3 emissions. Organisations should be incentivised to disclose their Scope 3 emissions and those that demonstrate transparent and accurate environmental reporting should be rewarded when they do so.
This line of thinking from the Advisory Group led to the inception of one potential use case on how to: increase the voluntary sharing of data – celebrating people who are doing it well by creating strong impact benefits, and making it interoperable to share with stakeholders and competitors.
One way of increasing the transparency and accuracy of disclosures is by moving away from reports in PDF format, adopting alternatives such as CSV or XBRL (eXtensible Business Reporting Language) with countries like Switzerland now pushing for the use of the latter.
Unlike PDF, which isn’t machine readable, making it difficult to compare companies at scale, XBRL is used to deliver human-readable financial statements in a machine-readable, structured data format, allowing for the comparative analysis that formats like PDF do not.
However, despite XBRL having the potential to report certain financial aspects of ESG, ESG disclosures also cover a range of non-financial topics. And, considering the continually evolving nature of ESG reporting, XBRL simply doesn’t go far enough to capture the broad nature of ESG disclosures.
We now look ahead to our next Impact Investing advisory group meeting on June 27. It’s here that we will prioritise two use cases, focusing on how to improve the data sharing and infrastructure of company impact data (scopes 1 – 3), to increase trust and data validation, thus enabling better impact investment decisions.