ESG is now of such importance to financial institutions that getting the data and technology aspect of the topic right has become crucial to the smooth running of their broader operations.
A report published by the Harvard Law School Forum on Corporate Governance is the latest high-profile examination of the growth of sustainable markets to conclude that ESG has become a priority of investors and asset managers. The report said that sustainability factors provided an additional lens through which institutions have begun to make their business decisions.
“Given the fluid landscape and scope of issues, the ESG mandate can seem overwhelming,” the report stated. “But overlaying all is an emerging recognition that ESG extends well beyond normal issues of compliance or corporate social responsibility — it is a core issue of business strategy that requires significant board and C-level engagement and robust internal controls appropriately scaled to address known and unknown risks.”
The Harvard report echoes a growing consensus that sustainability is now as vital a part of institutions’ everyday operations as research and regulatory compliance. Last week, the British Standards Institution, which sets rules for corporate behaviour, unveiled detailed plans of how it will formulate all future rules – and updates to existing standards – with regard to sustainable best practices. In the US, PWC reported that companies are taking the matter so seriously that senior managers are implementing internal ESG assessment processes even before the Securities and Exchange Commission passes the requirement into law.
Data is Key
The Harvard report similarly identified a theme common to other commentators on the subject – that ESG integration can only be achieved with good data and strong data management.
“Investors need to be able to assess the connection between difficult-to-value ESG elements and enterprise value,” it stated. “This is, in turn, driving a push for new types of information and data on these elements. It’s also motivating new ways of measuring corporate performance, including through ESG-focused indexes, ratings and industry-focused disclosure frameworks and standards, and by reviewing corporate documentation.”
It concluded that “companies should evaluate seriously the internal systems and tools that are being used to collect, scrub, analyse, verify and report that data”. Further, it called for disclosures to be independently verified and audited to safeguard against data risks that could lead to greenwashing accusations.
The growing consensus reflects financial software specialist NeoXam’s own position on ESG, and its assessment that data is the vital ingredient to establishing robust sustainability operations.
“It isn’t just for funds labelled as ‘ESG’ that investors want to know this kind of information, it is for all funds and assets in the same way that they demand information on financial performance,” Kifaya Belkaaloul, head of regulatory at the Paris-based company told ESG Insight. “The fact is, it is now seen as a fundamentally important information category, which can also be relevant to the broader mission statements of both asset managers and their clients.
“Ultimately, to succeed in this space, firms have to be able to harness the data that informs ESG ratings, and present it in a simple, clear way to investors and regulators alike.”
Raised Stakes
In its report, the Harvard Law School of Forum on Corporate Governance, added that growth in the ESG space was being accelerated by a combination of business need and regulatory obligation. A brewing backlash against sustainable investing in the US is also raising the stakes in strengthening data controls.
“Numbers and statements relating to ESG measures or topics need to be viewed with the same rigour as any other statement upon which investment decisions might be made,” it concluded. “Decisions cannot be made in silos or by isolated ESG professionals — but should be made in concert with company leaders to ensure alignment with strategy, values and the long-term business plan.”
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