The financial data industry is experiencing an ESG “lightbulb moment” as regulators and financial institutions get to grips with challenges facing corporate disclosure and data quality, according to Solidatus.
The recent introduction of the EU’s SFDR and, probably more importantly, the Bank of England’s stress tests of lenders’ climate risks are likely to prove a pivotal moment in the maturity of the sector, said Solidatus Chief Data Officer Lorraine Waters.
Her comments build on a white paper the data management company published last month in which it urged reporting companies and data consumers to begin preparing for tighter regulatory oversight of ESG disclosure. Some leading asset managers had got the ball rolling already by publicly taking a hard line on companies that fail to meet strict reporting guidelines, Water said.
“We’ve already seen the likes of Blackrock and Aberdeen and others decline to invest in funds that are not able to meet their criteria for reporting on ESG, and that’s going to continue to happen,” Waters told ESG Insight. “That was a wake-up call.”
Conflicting information
Regulations are still being forged to eliminate challenges facing sustainability and corporate social responsibility reporting. Market participants argue that it’s often difficult to make intelligent investment decisions because there is conflicting information on corporates’ ESG performance. Data is often lacking, requiring data management companies to fill the gaps with estimated and extrapolated calculations. Further, the intel may be difficult to map.
In its white paper, entitled “Practical data strategies for meeting ESG obligations in Financial Services”, Solidatus argues that regulators are formulating policies that will help overcome some of the data challenges. It won’t be long before investors are able to access a unified trusted body of comparable data, the paper states. Consequently, companies need to start budgeting for and working towards building compliance processes and workflows now.
“The ESG investing landscape is poised to become more defined, as competing definitions, standards and regulatory initiatives start to converge,” the paper states. “Given this background, the practical challenge for financial institutions is how to develop and implement an ESG strategy that is both effective and avoids box-ticking – and thus greenwashing risks.”
Stress testsIn the UK, the Bank of England’s Climate Biennial Exploratory Scenario (CBES) is piloting a process of climate risk declarations, requesting 17 banks and insurers to stress test their reliance to climate-related financial risks. The pilot is expected to be used as a template for future full industry reporting.
Although the results are being submitted now, the final reports aren’t expected to be published until the new year.
Industry observers have said the inaugural exercise has worried the institutions and central bankers because it has highlighted shortcomings in data gathering and quality. It’s also exposed banks’ lack of preparation for such a large scale intel-gathering programme (read more about this from ESG Insight here).
Waters forecasts the results, when published, will provide a crucial window into the sector’s shortcomings of ESG reporting.
“We will start to realise, then, where the gaps are,” she said. “Is it in the sourcing of data? Is it the ratings? Is it the internal accessibility of the data? I think it’s going to be a light bulb moment for many.”
In its white paper, Solidatus says that the gathering momentum of regulatory policymaking is bringing coherence to an environment of fragmented data taxonomies and methodologies.
New skills
There are encouraging signs that this process has begun in earnest, the paper states. As well as the SFDR and CBES, it points to the accountancy standard setter, IFRS Foundation, which plans to launch a Sustainability Standards Board at the UN’s COP26 climate summit in November.
One of the white paper’s final observations is that an understanding of data supply chains will be a requisite for companies beginning their compliance preparations. That will require new investment in new skills and workflows as well as a reassessment of decision-making structures, with greater recognition made of the importance chief data officers and their teams.
Once begun, the business of keeping companies compliant will be a huge undertaking, Waters said, comparing it to the implementation of the BCBS 239 risk data aggregation directive.
“In my mind it’s looking bigger than that,” she said “The banks have spent billions on that and still haven’t fully completed the work that needs to be done – and that started back in 2012.”
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