The focus on ESG: Spotlight on data
On 3 November 2021, the IFRS (International Financial Reporting Standards) Foundation Trustees announced on their website “the creation of a new standard-setting board – the International Sustainability Standards Board (ISSB) – to help meet the accelerating demand for sustainability.
“The mission of the ISSB is to deliver a global baseline which will provide investors and other capital market participants with comprehensive information about sustainability related risks and opportunities.”
In a context where the pressure and demand for environmental, social and ethical performance of companies and assets is accelerating, multiple regulators across OECD economies and beyond are asking for higher quality, transparent, reliable and comparable reporting by companies on ESG matters.
Investors and financial professionals’ interest toward ESG principles is driving the regulatory change and will continue to demand new standards we have never considered before.
While firms in the EU must already include a set of financial statements and narratives interpreting the measurement of the company’s ESG performance under the EU-mandated SFDR, the UK and US don’t yet have such a framework.
Described as a real strategic management lever, the extra financial information under the SFDR enables companies to deliver their qualifications to investors in terms of sustainable development as well as to confirm the commitment of their stakeholders.
With this in mind, it seems certain that the US and UK will implement their own ESG reporting standards in the near future.
As an industry, for some time we have been grappling with the best approach for harnessing and reporting on ESG data. Currently, ESG data is not standardised, so depending on the strategy, managers are left to do their own research and integrate that with third-party data. And third-party data, depending on the provider, is based on different methodologies for assessing companies as well as country EGS risk ratings.
Increasingly, managers are also asked to formulate ESG theses and provide climate-related data when reporting on their portfolios. This can be expensive, and where there are gaps in the data, modelling is required in order to estimate carbon footprints or the carbon intensity of certain products.
Overcoming this from a technical standpoint is no simple feat. Critical to integration is selection of a platform that at once meets the ESG need without disrupting current operations. As there is currently no agreed upon industry standard, firms need to clearly articulate the metrics they have selected, how these were chosen, how they will report and how they will be audited.
Of the dozens of reporting frameworks, the top five currently are CDP, CDSB, GRI, IIRC and SASB. There are so many because of the wide variety of companies now participating in ESG reporting, across all manner of sectors and each with their own ESG aspects and impacts.
Understandably, they will need to report on different metrics. Likewise, different stakeholders such as investors, regulators and customers are interested in different types of information.
As regulatory pressure grows, data strategy is paramount on most managers’ agenda. Digital transformation has allowed managers to embrace cloud technology and data warehousing to store both research and client data in a secure and efficient way. Centralised data dashboards, often built as a client-specific platform, allow managers to access their data and get a 360-degree view of their data landscape.
Firms can look at adopting a strategy that prioritises content delivery according to audience needs. This will help reports better engage diverse audiences. Companies can do this by having a balance between a collection of elements that satisfy the many audiences of the modern ESG report.
For those who don’t have ESG plans in place, it’s good to start collecting ESG data and associated metadata on deals and investments now. By analysing how your existing data warehouse structure can be used to store the additional metadata going forward, a firm will be able to start running modelling on deals once a strategy is in place.