A significant issue is data consistency. Despite emerging efforts from regulators and independent bodies to institute standards – such as the Task Force on Climate-Related Financial Disclosures (TCFD) framework –ESG information is often open to interpretation. Indeed, within climate risk, there’s open questions on what is considered environmentally friendly. How should carbon offsetting and carbon capture be counted in relation to carbon reduction, for example? Is nuclear energy “green”? This nuclear energy example has been the subject of much debate for the EU Taxonomy to accelerate decarbonisation and under strict conditions it now proposes that certain gas and nuclear activities to be considered as “environmentally sustainable”.10
There are also transitioning companies, those who may score highly on one element of ESG, while scoring poorly on another level. A solar firm is obviously enabling new green energy sources, but what if its board lacks diversity and it sources its components from factories with questionable labour practices? Insurers are struggling not only with inconsistent definitions and standards in the data, but also data that stretches across many types of E, S and G factors that can have patchy coverage and data gaps.
Data accessibility can also be a problem. While some insurers manage their own investments, many outsource to multiple asset managers, each of whom will apply their own methodology in assessing sustainability. This can lead to the insurer receiving inconsistent information across their overall assets unless they source information and measure ESG independently across their invested assets.