Organisations must resist the temptation to take a relaxed view of their ESG data in the absence of written governance rules, a data management expert has warned.
As investors and regulators put more pressure on financial institutions and companies to get their ESG processes in order, the risk of reputational and financial damage has risen for organisations caught greenwashing or failing to present sound sustainability reports.
Instead, data managers should put governance safeguards in place to prevent even accidentally breaching the largely informal codes of ESG conduct, said Hany Choueiri, Board Member, Sustainability and Vice Chair at Global Legal Entity Identifier Foundation (GLEIF).
“ESG is at a point where it’s an unwritten regulation and it carries similar risks – while it is unwritten the actual consequences are almost as severe as if it was written,” Choueiri told ESG Insight, comparing the principles that have so far guided ESG reporting to the BCBS 239 standards that apply to risk data.
“People don’t fear ESG at the moment, but actually they probably should fear ESG just as much as they fear BCBS 239 because of the consequences,” he added.
Choueiri was speaking ahead of an A-Team ESG Insight webinar on managing data governance for ESG, which will be held on July 12 at 3pm British Summer Time. He will be joined in discussions on the most pressing issues facing ESG data managers by Philip Miller, Co-CEO and Co-Founder of Solidatus and Paul Jones, Director, Data Analytics and AI Practice at Baringa Partners.
The webinar comes at a key moment for ESG data managers with regulators in the US, UK and Canada beginning to sharpen their approaches to sustainability reporting. Also in the headlines is growing unease among some politicians that sustainability markets aren’t delivering as they should, with accusations of greenwashing on the rise.That’s been heightened by the criminal investigation of Deutsche Bank’s DWS unit for allegedly mis-selling financial products as green investments. Police raids on the organisation’s offices were seen as a forewarning of what is to come once tough reporting regulations are fully implemented. Sensing authorities’ unease, several large funds soon after jettisoned dozens of companies and instruments from their portfolios after setting tougher internal green labelling rules.
Urgent Need
While those incidents arose from breaches of non-ESG laws and as a result of self-policing within the industry, Choueiri said governance of ESG data needs to be urgently discussed within firms to ensure they are ready to comply with enforceable regulations once they are enacted.
“You can see quite easily how you could be greenwashing very quickly if you don’t have governance frameworks around all this information,” he said.
A priority for any financial institution is to have its ESG data gathered in a central repository that’s overlooked by a chief data officer or chief sustainability officer, Choueiri said. With such a leader in place, data can be properly processed, distributed and monitored. This will help prevent duplication of information and maintain a log of what data is available.
That’s crucial because without oversight of data entering an enterprise, regulatory and risk management departments may inadvertently find themselves working from outdated or incorrect data, potentially leaving them vulnerable to accusations of misleading regulators or investors.
“There’s a fundamental need for whoever’s head of ESG – and frequently now you’re finding this role created – to be able to bring the data over to one place and govern it to make sure they understand who’s sending what data to whom,” he said.
“Frequently there’s too many touch points in the organisation – somebody is sending diversity numbers on the internet to shareholders, somebody else is doing climate reporting to regulators – and all of that is coming out right left and centre. There isn’t one team that’s looking to ensure they know who sent what to whom and on what basis to ensure that data is at least captured and cross-referenced somewhere.”
Central Liaison
Having a single entry point for ESG data will also enable its orderly normalisation, cleaning and mapping.That should mean at the very minimum ensuring lineage metadata is complete so that it can be properly analysed and audited, Choueiri added.
Centralisation would also give investors and regulators a clear understanding of who they should approach with any queries on the data or the firm’s ESG policy. A central liaison officer could help avert potentially damaging misunderstandings that could bring censure from regulators or pose financial risks to the company. Additionally, they would be able to oversee the interpretation of ESG regulations, which experience has shown are changing constantly.
“The message is get organised, set up an ESG function, define the roles and responsibilities and ensure you make it at least a single point where all of the information gets disseminated from,” he said. “That gives you a safety net so at least you know what’s going out to whom. Then you will have a chance to create consistency and reduce the risks of green washing.”
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