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2023 is the Year for Tackling ESG Data, Frameworks, and Compliance – from Front-to-Back

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By Janine Hofer-Wittwer, CFA, Senior Product Manager, Financial Information, SIX.

The role of data in financial markets is constantly evolving. However, ESG data is currently underrated and undervalued in terms of strategic importance and the future of finance.

Earlier this year, we saw new requirements come into force under MiFID II for banks and investment firms to integrate sustainability into their assessments and product governance. This builds on a steady stream of regulations across Europe. In the UK, ESG regulations are also being implemented, with the US and Asia expected to follow suit.

As the next level of the Sustainable Finance Disclosure Regulation (SFDR) comes into force in early January 2023, this should act as the kick start for market participants to take the jump to better get to grips with the requirements for ESG compliance and the opportunities this presents. Adding another layer, climate risk should also be front of mind, as other global regulatory developments are taking shape, first and foremost in relation to climate risk management and TCFD (Task Force on Climate-Related Financial Disclosures) alignment.

As we head into 2023, the development of comparable metrics, refining of disclosure standards, and access to quality data and data management strategies is what is needed to get the complete picture of a company’s climate-related risks.

On the whole, the industry has seen a significant move forward in the past 5 years in terms of streamlining and automating the process of data aggregation, as well as regulatory reporting. However, we now see some broader challenges around classifications under SFDR arising.

Firms are getting to grips with the European ESG Template (EET), and focusing more at the investment level, so they must ensure that ESG claims by companies are fully defensible and aligned to investors’ preferences. From a top-level perspective, data is driven by the needs of the front and middle office, first and foremost by portfolio managers and ESG teams. But the need for greater transparency and efficiency of the data brings in the IT, operations and reporting teams and opens the door for greater collaboration across the different areas.

To stay competitive, firms must align across front, middle, and back-office teams to guide the reporting process, as this will ensure more reliability and consistency that is needed to combat disclosure challenges that the industry collectively needs to overcome.

As a case in point and with ESG still being relatively new-found, not everyone has enough background to accurately define the E, S and G. But it is actually this type of common challenge that can be used to bring teams together and allow for more joint collaboration. This process can then be replicated across other parts of the business as well.

What we are increasingly seeing is an investor drive, backed by regulatory developments, for a multi-vendor solutions approach to ESG data, as firms are starting to realise that one size does not fit all. To stay ahead, firms must pivot their approach to look at the entire workflow.

The process is as follows: normalise, standardise, map, aggregate, distribute and integrate the data. However, using trusted data vendors that provide aggregated data in pre-established delivery formats acts as another layer of oversight and security for investment management firms.

Being able to pool together and funnel what are very broad, wide ranging data sets across a complex landscape through one provider is the next logical step for the industry. And this is where the collaboration message rings true. Through a centralised, procurement-led approach for data and operations management with multi-vendor access, investments firms can benefit from diversification on the one hand, but also more streamlined and tailored data integration.

If firms take this on, the benefits they will see are not only cost-saving, but also a better functioning business output as a direct impact of this investment. So while it may not seem obvious, ESG data and compliance strategy could result in a paradigm shift for greater collaboration between the different business units, and a more unified business strategy for ESG and beyond.

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