Huge steps have been made in recent years to bring ESG reporting standards up the level of reported financial information – but there’s a long way to go yet.
A shortage of data, a lack of harmonisation on standards and the sheer number of vendors are among the key challenges facing the industry as regulators get to grips with overseeing the space.
These are just a few of the pressing issues that will be discussed on February 8 when A-Team hosts its first ESG Insight webinar of the year. Titled “Sourcing and Managing ESG Disclosure Data to Ensure Compliance”, the event will gather three high-level figures in the sustainable finance sector to offer their views and comments on how the industry is developing.
Among the speakers will be Martina Macpherson, Head of ESG Strategy and General Management Committee Member at ODDO BHF Asset Management & Private Assets; Phil Davis, Director of ESG, Helios Investment Partners; and, Elisabeth Seep, Head of ESG Product Management at RIMES Technologies.A-Team Group Editor Sarah Underwood will moderate the event and the issues discussed will be further illuminated in A-Team’s ESG Summit, which will be held in-person and virtually in London on May 12th. “It’s still the Wild West in ESG, where you can have very different types of analysis, very different methodologies, very different approaches,” Seep tells ESG Insight ahead of the webinar. “Some collect data from companies directly, some use machine learning and alternative data to scrape data sets, so you’re getting very different source data. And that’s a challenge.
Asset managers are facing huge pressure from clients to put their money to impactful use. Bloomberg estimates that the total amount of capital tied to sustainable assets will reach US$30 trillion in the next few years. But without the right data, managers are unable to compare assets and determine which fit their ESG mandate.
ODDO’s Macpherson argues that one of the biggest challenges is getting ESG data reported in the first place. Not only are corporates often not sufficiently set up to provide the information, the lack of a standardised language on how to report on ESG makes it difficult for even the most willing companies to comply.
“You have the challenge that information on sustainability and climate risks is only provided annually, very often already out of date by the time it actually ends up amongst ESG research and rating agencies on the one hand and investment managers, NGOs and other information users at the other,” she tells ESG Insight.
A competing range of ESG reporting standards, methodologies, materiality frameworks and taxonomies may be muddying efforts to encourage firms to report their sustainability data accurately and help asset managers better serve the demands of their clients.
The result, says Macpherson, is what a study by MIT Sloan Business School called “aggregate confusion” – too much noise and misaligned ESG ratings that can be baffling and misleading to investors.
“We have to be very careful now – and this is something that many investors and corporations see – that we are not multiplying reporting fatigue, and ultimately, again, creating additional layers of aggregate confusion,” Macpherson warns. “Not only at the level of when and where company information is reported and aggregated, but also how investors are interpreting this information.”
Both speakers are nevertheless optimistic that the industry is on the right path.
RIMES’ Seep believes that the youthful sector is simply going through the processes of growing up and finding its feet – sometimes clumsily – as it grows at a rapid pace.
“It’s a lifecycle and a journey for ESG data,” she says. The ESG data industry “is still in that early growth stage. I’m sure benchmark index data used to be like that at one point, pricing data was like that at one point – it’s just an evolution and ESG data will get there.”
“We have come a long way, in the past five years in particular, to harmonise standardisation efforts for reporting – through the corporate reporting dialogue on the normative side, and of course, the increasing focus on regulatory efforts.”
Many assume that the sector will continue contending with the patchwork quilt of regulations, reporting standards and methodologies until a consensus is reached, which Seep thinks will start emerging in force years.
But Macpherson thinks the work of the Financial Data Exchange Templates (FinDatEx) to standardise how ESG data can be exchanged will offer a roadmap as soon as this year on how the industry can proceed.
The organisation, which comprises members of Europe’s financial institutions, said this month it will offer its European ESG Template (EET) in time for asset managers to offer aligned products by June 1.
“This will become one of the major developments at least in the investor, and fund products financial products reporting space, because for first time a group has made the effort to align the leading regulatory requirements coming out of SFDR and taxonomy as well as the major stewardship codes and all the key labels,” she says. “I think there is no other reporting template that provides such an in-depth effort for fund-level, product-level, reporting in line with ESG.”
Seep sees the data providers playing a leading role in smoothing ESG sustainability reporting. They have the data management skills to help make sense of the datasets as they grow, she says.
“That can help clients navigate this data and answer the questions that they need to answer in their investment process and make investment decisions,” she concludes.
- Register here for the A-Team ESG Insight Sourcing and Managing ESG Disclosure Data to Ensure Compliance webinar at 10am US / 3pm UK time on February 8, 2022.