ESG data stress – Part 1

In our previous Insight on ESG Management, Bart Carlier and Sabine Swennenhuis elaborated on the various regulations (SFDR, EU Taxonomy and CSRD) requiring disclosure of ESG data. Consequently, they stressed the need of ESG data and the challenges that financial market participants face while complying with the regulations; more specially the availability, reliability, and accuracy of data.

This insight focusses on the availability of ESG data for reporting and risk management. Stress, if any, due to the accuracy and ambiguity of ESG data once obtained, is discussed in Insight ESG Data Stress – Part 2.

DATA AVAILABILITY – WHY THERE COULD BE STRESS?

Currently data availability to comply with regulations and internal ambitions for reporting and risk management is by far the biggest stress factor. Reporting requirements are new and, relatively, stand alone. ESG data has not been required in previous ECB driven regulations, while the inclusion of ESG metrics in management reporting is limited to the information for which data is collected relatively easily. Next to that, data generation and data collection processes have to be implemented from scratch.

WHAT CAN YOU DO YOURSELF?

The main chunk of data needed for ESG reporting and risk measurement is external data. Financial institutions must collect data about external parties related to their assets: counterparties in finance transactions, investees, fund managers etc.

Financial institutions can collect ESG data themselves. They are already collecting a bunch of client and transaction data through KYC and transaction screening processes. Integrating the collection of the new ESG data in the already existing procedures can be effective, especially for non-listed clients. Leveraging these existing channels reduces any concern for unnecessary outreach to clients. Additional training is needed to front line staff and KYC analysts to ensure the ESG data is properly understood; this to ensure reliability and comparability of data after collection.

In addition, financial institutions can make bilateral agreements with Asset Managers for data provision when it concerns data for investments and investees. Especially gathering data for alternative investments (Real Estate, Private Equity, Private Debt) has proven to be difficult.

Data can also be gathered from publicly available sources such as company websites, annual reports, and corporate social responsibility reports, but this is very labour intensive and the counterparties or investees that publish these results are mainly listed companies. That is why ESG data vendors are perceived as a welcome alternative.

ESG DATA THROUGH DATA VENDORS

ESG data vendors deliver data just like regular market data vendors. However, instead of prices and curves they deliver a whole variety of ESG figures (such as Emissions data, ESG risk ratings, country screening and much more). Selecting the optimal ESG data vendor is not as straight forward as you may expect as the ESG market data vendor market is cluttered. Therefore, proper preparation is key to select the right data vendor(s). It starts with a comprehensive assessment of scope, data as well as functional requirements:

• Which purposes must be met: e.g. specific ESG regulation vs. ESG risk management vs. general ESG insights?
• Which counterparties (scope) and which investees are in scope: e.g. listed companies vs. real estate vs sovereigns vs…?
• Which service model is needed; e.g. receiving solely data vs. receiving the data including a calculation service vs. a fully outsourced ESG solution?

Once those questions have been clarified, the actual vendors can be assessed. The above mentioned topics require investigation as well as other topics, such as:

• Methodology; what methodologies do the different providers apply and which methodology matches your view model.
  Note that ESG data and ratings providers adopted their own methodologies and processes due to a lack of global reporting standards and agreement on what should be deemed as material for each sector.
• Coverage; Assessing for what percentage of counterparties, fund (managers) and investees different vendors have data available
• Look-through; Is the look through of funds (if required) available and how many levels of look through can and will different vendors apply.

Overall selecting the right ESG data vendor is quite a time consuming process. A couple of actions can help you conduct an ESG data vendor RfP as efficient as possible:

1. Engage stakeholder upfront and specify all their desires.
2. Translate their desires by defining the scope, data and functional requirements before reaching out to data vendors.
3. Then draft a planning, communicate this with stakeholders and stick to it.

MULTIPLE VENDORS, WHOM TO CHOOSE?

To help our clients to quickly move from a long list of data vendors to a smaller list of potential vendors, we have categorized the ESG data vendors:

1. Market & ESG focused: data providers that can deliver both regular market data & services as well as ESG data.
2. ESG focused: data providers that solely deliver ESG research & data.
3. Specialists: data providers that deliver data primarily focused to one topic/product/asset class/region.

LOOKING FORWARD: DATA IS NOT THE PROBLEM, IT IS THE SOLUTION

Even though ESG reporting currently comes with a lot of data challenges, we strongly believe that the solution also lays within the ESG data. Data availability will significantly increase in the coming years as counterparties and investees will increase disclosure of ESG data.

Reliability of data will also improve over time. Although currently, the various data vendors apply different methodologie we expect these methodologies to be converted in the coming years. Initiatives like the Partnership for Carbon Accounting Financials (PCAF) will also contribute to this improvement.
In addition, the process of collecting data through internal processes will become more mature and stable, which will add to the reliability.

ESG Data Vendors will find their permanent position in the reporting and risk measurement landscape. Like market data vendors already did. Financial institutions will simply not grow sufficient capabilities and depend on external specialists to realize the required scalability.

HOW CAN WE HELP?

Mount Consulting advises various financial institutions on the implementation of ESG reporting and ESG risk management. From the interpretation of the ESG driven regulations up to the implementation of regulatory compliant reporting and risk management.

Please look at our ESG Service Proposition or contact us.