ESG disclosures of infrastructure assets fall short of EU rules
Although infrastructure assets are some of the most obviously exposed to environmental and social risks, reporting frameworks for investors largely fail to take them into account.
A growing number of investors in infrastructure are pursuing improved environmental and social outcomes while also improving the yield and diversification of their portfolio. This is important, but environmental, social and governance (ESG) factors also open up risk management and asset pricing questions. Regulatory initiatives, such as the EU’s Sustainable Finance Disclosure Regulation, will soon require the integration of ESG-related financial risks in investors’ reporting.
At EDHECInfra, Nishtha Manocha and I reviewed several of the main ESG reporting frameworks used by investors and found that they are primarily designed to assess the impact of infrastructure companies — they are less apt at understanding their ESG risks.
We reviewed 17 ESG reporting and assessment frameworks and mapped 4850 individual disclosures to determine to what extent this information can help assess investment portfolios’ risk. The results are included in a recent paper, ‘Towards a scientific approach to ESG for infrastructure’, which we published with French bank Natixis.
We found that infrastructure ESG disclosures show considerable differences in scope (including in the definition of infrastructure and of 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, most importantly, a bias towards measuring impacts (88% of all disclosures) rather than the risks to which infrastructure companies are exposed.
In effect, these disclosures are unable to achieve a clear distinction between impact and risk. Instead, they tend to be lists of things that matter, and do not necessarily focus on trying to measure the ESG risks to which investors in infrastructure companies are exposed. These disclosures have created a rich set of indicators that are useful to evaluate companies’ ESG targets, but are not designed to answer financial questions — such as what is the the correlation between a company’s positive or negative impact on the environment and society, or how can this influence that company’s level of risk.
The need to comply with regulatory requirements, the urgent need to address climate change and rising wider pressures for monitoring and reporting ESG factors are likely to drive rapid consolidation between the main reporting frameworks. Decisive steps are also needed to develop a more objective, detailed approach to ESG reporting. This should include an ESG taxonomy created specifically for the infrastructure sector and guidelines on the implications that ESG factors have on specific infrastructure assets. Artificial intelligence techniques can support the potentially overwhelming task of documenting data. Infrastructure needs smarter disclosures — this is as important for investors as it is for the whole infrastructure sector.
Frédéric Blanc-Brude is the director of research firm EDHECInfra
