Lily Turnbull, Head of ESG, C2 Cyber, writes that last year a record USD649 billion was invested in Environmental, Social and Governance (ESG) focused funds worldwide, up from the USD542 billion in 2020, according to the latest Refinitiv Lipper data. This increase means ESG funds now account for 10 per cent of global fund assets.
Despite this huge growth, Capital Group’s ESG Global Study 2021 reveals that 49 per cent of investors say a lack of robust ESG data is holding back their organisation’s further adoption of ESG. While 75 per cent use active funds to integrate ESG factors and 67 per cent say integration is their preferred ESG implementation strategy, issues around ESG data are limiting investors’ ability to increase their integration.
Furthermore, with the European Commission’s launch of Level 2 of the Sustainable Financial Disclosure Regulation (SFDR) next January, which introduces regulatory technical standards (RTSs) where investment firms have to justify their fund categorisations through a series of environmental and social principal adverse impact (PAI) disclosures, the pressure is now on for many to improve their approach to ESG data collection and analysis.
Challenges with sourcing ESG data
There are numerous challenges with sourcing ESG data. For starters, there’s too much emphasis on self-reporting and self-disclosure, meaning companies can choose the level of data they reveal depending on their interpretation of ESG requirements. This exposes them to accusations of greenwashing. Also, the data is often sketchy, inconsistent and backward-looking, so doesn’t give a full and up-to-date picture.
Another core challenge is that many financial services organisations lack their own ESG data competencies because there aren’t enough data scientists and engineers with the right expertise to collate and analyse their vast amounts of data. In addition, they often don’t have the right tools in place to develop an appropriate ESG data analytics solution. This is exacerbated when collecting ESG data on SMEs and private companies where there is less information readily available and typically a lack of infrastructure in place for reporting their ESG performance.
Complying with upcoming regulation
While sourcing ESG data is challenging, regulation can be complex and overwhelming. The European Union’s upcoming Level 2 of the SFDR requires investment firms to provide extensive disclosures on sustainability factors in their ESG labelled funds including greenhouse gas emissions and carbon footprint.
But to comply with Level 2, investment firms must collect the right data from various sources, then map it into a singular and robust data model. The process also requires intensive data quality checks to ensure accuracy and transparency, making it a costly and time consuming exercise. But if you have hundreds of companies in your portfolio, the resource required soon adds up. Investment firms need to find the right assessment mechanism that balances time, cost, accuracy and transparency.
Performing thorough ESG audits
By making good use of new tools and technologies to evaluate ESG data, firms can produce higher quality outputs. The best solution is to work with an ESG data provider that is aligned with international frameworks and standards, to perform a thorough, accurate and cost effective ESG audit.
One way of conducting an audit is to get your portfolio company to complete an ESG questionnaire. This collates data about the company’s management of, and exposure to, various environmental, social and governance metrics, for example, climate change and energy. The data is then analysed to identify key areas of risk. In addition, open-source intelligence (OSINT) is collected from publicly available data sources including news feeds, social feeds, websites and NGO reports and used to provide an additional layer of assurance about a company’s ESG performance based on consumer and market sentiments, and any areas of controversy.
Next, information from the initial assessment, supplemented by intelligence from the OSINT feed, is displayed as actionable data on a dashboard. This allows you to drill down into key risk areas, monitor trends and conduct reassessments to ensure continued compliance.
Scaling your ESG requirements
While there is more ESG data than ever before, investors are struggling with the availability of robust and quality data to support green claims in their ESG funds.
As the regulatory landscape moves towards a greater level of standardisation with the upcoming SFDR Level 2 launch next year, firms are now finding themselves under pressure to find the right approach to data collection and auditing.
However, by harnessing digital technologies, you can reap the benefits of a cost and time efficient solution to manage ESG auditing. By sourcing the right data, identifying risk factors and overseeing remediation actions, you can ensure your portfolio companies reduce risk and meet new regulatory requirements. This is all while quickly and easily scaling your ESG due diligence right across your portfolio.
