Sustainable finance has a green (ESG) data dilemma
One of the key challenges facing sustainable finance is the lack of reliable data. European DataWarehouse (EDW) in Frankfurt houses data on over three billion European loan records and the insights that go along with that. This includes data on Energy Performance Certificates for cars and housing loans for example. Dr Christian Thun, data scientist and CEO at EDW, will join the panel discussion “Tackling the ESG data gap — acquiring the right and effective data” at the Sustainable Finance and Climate Risk Event. EDW is a securitisation repository which collects, validates, and distributes detailed asset-class specific data for asset-backed securities and whole-loan portfolios.
What are the main challenges for financial institutions regarding ESG data in your view?
“On the one hand, investors are seeking a wide variety of opportunities for green investments. On the other, issuers are struggling to demonstrate the green-ness of their financial products. This is a challenge because this type of information has never been collected before. Two key hurdles at the present time are therefore data accessibility and a lack of comparability. As Europe’s leading securitisation repository, for over a decade now, we hope to play a significant role in providing some light at the end of the data tunnel.”
What role do you see for data in the ESG investment space?
“Data can certainly help sustainable finance. We have already seen green bond issuance for several years, with the first around 2010. The data aspect of sustainable finance is outgrowing its infancy. The EU Green Bond Standard is a good example of this. And the European Banking Authority’s note on how to apply it to securitisations is another. The financial industry is being very innovative and striving to make green investments work. In my view, one key solution to foster these efforts is through the availability of better and more clearly structured data.”
Is data the way forward in your view for Sustainable Finance?
I am totally convinced we need sustainable finance and funding to support the transition from a very fossil-fuel dependent economy to a more renewable and sustainable economy. The Taxonomy, the ESG criteria, and the SDG criteria all help to make everything clearer, but there is still room for improvement.
Do you have some insights which the EDW data has brought to light?
We have found some interesting data on Energy Performance Certificates (EPCs) for housing and car loans. For example, we found that the wealthier households are, the greener the houses are they seek mortgages for. This was a subject which came up while we were looking deeper into the resilience of loan portfolios against the current energy crisis.
What conclusions can you draw from this data?
The data showed that more affluent households (the greener ones) are more resilient against higher energy prices. By contrast, low-income households living in less energy-efficient houses will be confronted with a far bigger challenge when facing higher energy costs. Interestingly, this insight suddenly turns the environmental viewpoint into a social topic.
How do banks assess the green-ness of their property portfolios if there is not officially available EPC data?
The green-ness, or otherwise, of portfolios is relevant for banks in the context of stress testing, product development, and future business planning. As we see, low-income households are much more exposed to high energy prices than more affluent households with more energy efficient houses. So better energy efficiency implies better loan performance and more resilience in the context of an economic downturn. Many European real estate lenders don’t have EPC information included in their mortgages yet. We have developed a proprietary software solution to help consolidate housing energy performance data from multiple sources. This tool, called Guiditta, helps banks match their information and their mortgage portfolios with publicly available information on the energy efficiency of local housing. They then they have a better idea how ‘green’ their portfolio is.
Do you have an example of some “green” data which illustrates your point regarding ESG data (in)consistency?
Some of the research we have done regarding Energy Performance Certificates of cars illustrates the current green data dilemma. Unfortunately, our car loan data shows that European auto EPCs are not harmonised. This means that, for example, a heavy SUV may be granted a green rating in Germany as it has efficient fuel economy relative to its weight. However, in another country like France this vehicle would rate dark red and highly polluting. The opposite can also be the case for small, inefficient cars. This type of inconsistency raises obvious questions concerning “green-ness”.
What could be the solution for this?
I very much hope harmonisation soon takes place on the EPCs of cars. This is already taking place in housing with the European Building Directive, which aims to harmonise EPCs for housing across the EU by 2026. I hope that similar initiatives will be launched to harmonise car and other ESG data in future. While there are obviously several challenges to overcome to create meaningful and harmonized data sets, the market needs and demands further development on data. These types of anomalies must be ironed out in future.
Do you see a role for your organisation in this?
At EDW, we would welcome the opportunity to leverage our data collection and analysis experience to further pave the way towards consistent and harmonized European ESG data. We have very solid foundations as a data repository for securitisations, perhaps there will be future EU ESG reporting initiatives which require similar data centralisation services. Our door is always open!
What do you hope to gain by attending the Sustainable Finance and Climate Risk Event?
We are relatively new to the Sustainable Finance community, so we will be there to listen and to learn. We would like to understand more and hopefully contribute to the ongoing discussions on sustainable finance and climate risk. I believe that consistent and harmonised data can provide the sustainable finance and climate risk community with a lot of the answers it is looking for. Because as someone once said: “If you don’t have data, you just have to believe whatever the other person tells you”.
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