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‘Start Early’ Warning as European ESG Regulations Loom

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The coming months will be crucial for financial institutions’ preparations for European ESG regulatory compliance, with new rules due to snowball this year prompting warnings that firms should begin locking in their data provisions.

Data vendors are responding by unveiling new products to help clients navigate the region’s developing regulatory landscape. But while the piecemeal – and sometimes contradictory – application of rules means whole swathes of the regulations won’t come into force until later, financial institutions and corporates have been urged not to delay in getting their data setups in order.

There are “a lot of things in the pipeline” this year, EcoFact Head of Regulatory Advisory Gabriel Webber said in a webinar update. “Engage as early as possible with your internal and external stakeholders to ensure that you have the data that you need to report… because you will need to have a lot of data coming from investee companies, the companies you are lending to and are insuring.”

The complicated interplay of the Sustainable Finance Disclosure Regulation (SFDR), the European Unions’ Taxonomy and other associated laws, including the Non-Financial Reporting Directive and Corporate Sustainability Reporting Directive, will see new acts passed in the region this year and early in 2023. The outcome of consultations on the Regulatory Technical Standards for the taxonomy also pose the possibility of more changes in the coming months.

Data companies have stepped up a gear to create products to help firms meet their eventual obligations. In the latest development, Impact Cubed launched a data and analytics reporting tool to aid companies with their EU Taxonomy obligations.

The taxonomy is a classification system that companies will use to gauge whether their activities have an impact on a set of defined environmental objectives. There are six of them, and this year the EU will expect reporting on two – climate change mitigation and climate change adaptation. For the other four – biodiversity and ecosystems, circular economy, pollution prevention and protection of water and marine resources – companies will merely have to prove they “do no significant harm”.

SFDR Products

Late last year investment management firm SimCorp launched two SFDR-focused reporting tools. SFDR is the broad law that will govern how financial institutions disclose data on their sustainability performance on the companies and instruments in which they invest.

A multitude of providers are also making it easier for corporates to calculate their own ESG impacts to help them comply with CSRD, which will make similar obligations to non-financial companies when it’s implemented. Among them Persefoni, began offering clients carbon accounting tools late last year.

Data providers have also been bolstering their capabilities by purchasing similar services; S&P Global acquired The Climate Service in January and ICE snapped up real estate risk analytics firms risQ and Level 11 Analytics in December.

Moody’s Investors Service Senior Product Manager for ESG Remi Koplinski said that the complexity of the various threads of regulation would impose a huge burden on reporting companies in terms of time and organisation.

“It’s almost impossible to find all of the data,” Koplinski said at the event. “It’s actually quite a big task to figure out how to do these assessments and what information you can use.”

Alignment Concern

Starting early would help reporting entities better understand their own risks. Koplinski said it was likely that many companies, once they began reporting their ESG performance, would find that they are poorly aligned with some of the regulations’ expectations.

That would be especially problematic for fund manufacturers, who may find their portfolios were way behind their competitors’ in terms sustainability performance.

“This is the type of insight that data can give you and can help you prepare to respond to the market,” he said.

Nevertheless, Koplinksi was optimistic that the rapid development of the ESG space meant that it was getting easier for companies to begin sourcing and managing data ready for compliance.

For the first time, he said, different data vendors are providing very similar datasets, increasing opportunities to “mix and match” sources to get a fuller picture of ESG performance.

Also, he said, companies would become increasingly creative with their use of data as their understanding of what’s expected of them deepened.

“I think there is an exciting time ahead, where some of the kind of objectives of the regulation will start kicking in and innovation will drive how the flow of money is directed towards more greener investments and how we can hopefully transition a bit better,” Koplinski said.

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