Financial services firms looking to make or offer investments that are ESG (environmental, social and corporate governance) friendly have identified data transparency, availability and data costs as significant ESG data challenges.
These issues are addressed in a recent report from IOSCO, an international association of securities regulators, and confirmed by EFAMA, a European asset management industry group.
Much of the discussion focuses on the lack of standard, publicly available ESG data from corporates. This has resulted in data products being offered by data vendors and ratings agencies, which service a need but come with their own challenges around methodologies, data standards and potential conflicts of interest. The EU’s Sustainable Finance Disclosure Regulation (SFDR), which took effect early 2021, and its related taxonomy to apply in 2023 have begun to ensure the issues are addressed, but there is a long way to go.
The key criticism is that the usability and reliability of ESG ratings and data products that are needed to do business and comply with regulations are undermined by a lack of transparency in the methodologies used by ESG data and ratings vendors. Also, in some areas there is a lack of necessary data, or gaps in the data available on investee corporates. Through its proposed Corporate Sustainability Reporting Directive (CSRD), the European Union aims to ensure that standards for corporate sustainability reporting (for listed EU companies) are on a similar level and reliability as for financial reporting. But again, there is a long way to go.
Specific ESG Data Challenges
Specific problem areas with ESG data and reporting include:
- Quantifying facts such as carbon footprint or investment in biodiversity and ecosystems. There is a lack of data, so one needs multiple sources to feed into calculation formulas. Additionally, the time periods to which data relates might not be consistent across all data sets, and therefore require normalizing.
- ESG scores and ratings are dependent on methodologies. These need to be transparent.
- Issuer-provided underlying data does not follow a common standard or format, so the metrics produced from that data can become flawed or unclear. A lack of ESG data standards makes it difficult for financial firms to leverage multiple data sources and create a complete picture.
For their part, EFAMA wants ESG data providers to improve transparency by having standards for disclosing how data is collected and for scoring data. EFAMA also calls for transparency in ESG governance processes, regulatory review of data providers’ pricing policies to help smaller firms consuming this data, and closing the gap in access to ESG data through public, non-commercial data distribution.
IOSCO Recommendations
IOSCO’s recommendations, detailed in a full report, are similar but also include calls for:
- Greater reliability of raw ESG data
- Addressing potential conflicts of interest, specifically separating ESG ratings from data products and consulting services being sold
- Improving communication between data providers and consumers
At present, financial firms are expected to undertake research, construct sustainable portfolios and sell green funds without the benefit of standards being in place or complete data being available. So, effective tooling to overcome this situation is an imperative. Firms and institutions need:
- Easy access to, and querying of, data from a large network of ESG data providers to get all the ESG data coverage that is relevant to their research, analysis, fund/portfolio management and reporting.
- Native cross-referencing of the materiality of the data provided by different sources, to arrive at as much standardization as is possible
- The ability to drill down into underlying ESG data and uncover insights based on specific components of the information is reveals.
Addressing ESG Data Challenges
The sheer difficulty of getting consistent, standardized ESG data, will take time to be remedied by regulators and industry groups. In the meantime, ESG data providers and ratings agencies will have to revise products while considering how to align their proprietary methods with new frameworks and taxonomies — without losing the intellectual property that distinguishes their offerings. This predictable evolution of ESG data sources and requirements will mean financial firms will face ongoing change in ESG data management and related business processes over the coming years. To ensure effective ESG-related operations, flexibility and nimble change management will be key.
For firms that want all the available usefulness of ESG data without having to manage the constant IT and process change, using GoldenSource ESG Impact means they can already achieve a lot of what IOSCO is pushing for regarding standardized ESG data drawn from disparate data sets. To learn more about GoldenSource ESG Impact, please contact us.