The country’s first such framework, created by the Financial Conduct Authority (FCA), is aimed at preventing greenwashing and fostering trust in British sustainability markets. It’s designed to protect the interests of investors by enshrining strict rules on how financial products can be advertising, marketed and labelled, and seeks to ensure such information is “fair, clear, and not misleading”.

Critics, however, have pointed to several potential pitfalls that face institutions as they put processes in place to comply with the new SDR. Because the FCA requires that all claims must be backed by robust and credible data, many of the new challenges are likely to be borne by firms’ data teams.

New Classifications

Under the SDR, asset managers – and later portfolio managers – will be expected to provide greater transparency into the sustainability claims attached to their funds and provide data to demonstrate the ESG performance of the funds’ component companies.

Institutions and companies in scope will be asked to voluntarily categorise their investment products according to the concentration of sustainability-linked assets within them. There are four categories of declining levels of sustainability, ranging from “Sustainability Focus” to “Sustainability Mixed Goals”.

This reflects but differs from the European Union’s Sustainable Finance Disclosure Regulation (SFDR), in which asset managers are compelled to classify their products’ according to a similar range of categories.

Among several other SDR requirements, asset managers will be asked to provide entity- and product-level disclosures and adhere to new fund naming regulations – which forbid the use of descriptions that it terms as “vague”, including “ESG” and “sustainability”.

Effective Strategy

While the SDR has been welcomed as a good first step by campaigners for stronger and more transparent sustainability markets in the UK, its implementation could prove tricky. Among the challenges institutions face is the code’s apparent incompatibility with other similar regulations that firms would face overseas. Some observers have complained that the SDR’s fund sustainability categories don’t easily match the Articles 6, 8 and 9 classifications of the SFDR.

This is where data managers will be of critical importance.

“As with all regulations, financial institutions must ensure they have an effective data management strategy in place from now, enabling systems to efficiently collect and aggregate ESG risk-related data to evidence sustainability claims both internally and externally,” GoldenSource head of ESG, connections and regulatory affairs Volker Lainer told Data Management Insight.

“Now, much higher levels of scrutiny are needed on the underlying methodologies and calculations involved in determining ESG scores. Firms that prioritise this will find themselves in a much stronger position as and when the next stages of the UK’s SDR are implemented.”

Data Doubts

The FCA announced the details of the SDR in November last year. It stressed at the time the importance of data management to compliance with the SDR last year. Firms in scope should “have in place appropriate resources, governance, and organisational arrangements, commensurate with the delivery of the sustainability objective”, it said.

“This includes ensuring there is adequate knowledge and understanding of the product’s assets and that there is a high standard of diligence in the selection of any data or other information used (including when third-party ESG data or ratings providers are used) to inform investment decisions for the product,” it said.

Legal experts questioned whether the UK’s financial industry would be able to fully comply. In a report published in April, international law firm Baker McKenzie asked whether firms would be able to keep up with the data requirements expected of the regulation, and questioned whether the data would even be available.

Careful Consideration

While gaps in ESG data still exist, A-Team Group’s ESG Data and Tech Summit London heard that the data record is improving with many more vendors providing ever granular datasets. Market figures caution, however, that the data imperative of the SDR should still be carefully considered.

“With more specific product labelling rules set to apply to from July, UK firms must brace themselves for these ongoing changes to better navigate the complexity jungle. It is clear data and regulatory content mapping is the key differentiator for service providers here – relying on trusted vendors that can provide quality, accurate data and content in pre-established delivery formats,” said Martina Macpherson, head of ESG product strategy and management in the Financial Information division at SIX.

“This is the only way firms can back up their sustainability credentials, meaning they will be better placed to meet new regulatory requirements and prepare for those to come later this year.”

The post UK’s Debut SDR Rules Raise Data Management Concern appeared first on A-Team.

Enter the Corporate Sustainability Reporting Directive (CSRD), the ambitious regulatory framework aimed at standardising sustainability reporting across the EU. As firms scramble to align with these new requirements that become mandatory for the first tranche of covered firms in 2025, the directive promises to reshape the landscape of corporate sustainability, holding companies to a higher standard of environmental and social responsibility.

The Securities and Exchange Commission (SEC) has attempted to implement its own set of guidelines. However, these efforts continue to be entangled in a web of litigation and partisan debate. As firms navigate this turbulent environment, the contrast with Europe’s more pragmatic approach becomes apparent.

In this article, we will delve into the CSRD implications from the contexts of governance, workflow, data management, and enabling technology and explore the challenges that arise in each area.

The Corporate Sustainability Reporting Directive (CSRD)

The CSRD mandates that companies report in accordance with the European Sustainability Reporting Standards (ESRS). These standards encompass a broad range of sustainability topics, structured into two general standards and ten topical standards covering ESG aspects. The general standards (ESRS 1 and ESRS 2) provide guidelines on the overall framework for sustainability reporting and general disclosures that all companies must make. The topical standards delve into specific areas such as climate change, pollution, water and marine resources, biodiversity, and social matters like labour practices and human rights.

Companies must conduct a double materiality assessment to identify which sustainability issues are material from both an impact perspective (how the company affects the environment and society) and a financial perspective (how sustainability issues affect the company’s financial performance). This comprehensive approach ensures that all significant sustainability impacts, risks, and opportunities are reported.

The European Financial Reporting Advisory Group (EFRAG) provides comprehensive guidance on implementing the double materiality approach required under the CSRD. Double materiality encompasses both financial materiality (how sustainability issues affect the company’s financial performance) and impact materiality (how the company’s operations impact the environment and society). EFRAG has been tasked with developing the digital XBRL taxonomy for the ESRS, which will facilitate the tagging of sustainability reports in a machine-readable format.

EFRAG’s implementation guidance (IG) outlines several critical steps and considerations for firms to measure materiality effectively:

Understanding Context and Stakeholders

Firms are advised to start by thoroughly understanding their operational context, including business processes, business relationships, and affected stakeholders. This step involves mapping the company’s value chain to identify relevant sustainability matters and potential impacts, risks, and opportunities (IROs).

Criteria for Materiality Assessment

EFRAG recommends using objective criteria to assess the materiality of identified impacts. For impact materiality, companies should evaluate the severity of impacts based on their scale, scope, and irremediable character, along with the likelihood of potential impacts. For financial materiality, the focus is on the magnitude and likelihood of financial effects, including performance, financial position, cash flows, and access to capital.

Stakeholder Engagement

Engaging stakeholders is crucial for substantiating the materiality assessment. This involves consulting affected stakeholders (e.g., employees, communities) and users of sustainability reports (e.g., investors) to gather diverse perspectives and ensure the assessment reflects the concerns and priorities of all relevant parties.

Key Challenges for In-Scope Firms

ESG terminology introduces many new terms and definitions, some of which are not readily represented digitally, creating new data requirements and sourcing challenges.

Existing GRC teams will need to absorb new roles and responsibilities, or new roles will need to be created and positions filled with the right skill sets. The terms of reference, authorities and accountabilities for these roles must be clearly defined.

Integrating materiality assessments into corporate governance frameworks requires that boards and senior management be actively involved in overseeing the materiality assessment process, ensuring that sustainability considerations are embedded in strategic decision-making. Regular updates and reviews of the materiality assessment process are essential to maintain its relevance and effectiveness

The materiality assessment process must be integrated into existing business processes, particularly risk management, strategy development, and reporting. This integration ensures that sustainability risks and opportunities are considered alongside traditional financial metrics.

Companies will need to collect, process, and analyse large volumes of sustainability data from many sources. including internal operations and external stakeholders. One of the biggest challenges will be identifying, collecting and preparing these new data sources. Scope 3 emissions data is particularly complex in this regard.

Scope 3 emissions encompass the indirect greenhouse gas (GHG) emissions that occur throughout a company’s value chain, both upstream and downstream. These include emissions from suppliers, business travel, employee commuting, waste disposal, and the use of sold products.

Unlike Scope 1 (direct emissions from owned or controlled sources) and Scope 2 (indirect emissions from purchased energy), Scope 3 emissions are often the most challenging to measure and manage due to their diffuse nature and dependence on third-party data. Despite these challenges, addressing Scope 3 emissions is crucial as they frequently represent the largest portion of a company’s total carbon footprint.

Scope 3 emissions include those produced by suppliers (upstream) and by customers using the company’s products or services (downstream). Scope 3 is critical because it often represents the largest portion of a company’s total emissions, significantly affecting the company’s carbon footprint.

Effective management and reduction of Scope 3 emissions are essential for companies aiming to achieve net-zero targets and contribute to global climate goals. Ideally, carbon footprints would be available at individual workload levels in near real-time. But that’s a long way off, and several things need to happen before it becomes feasible. Principal among these is the lack of scope 3 data granularity currently available from cloud service providers.

Data centre power consumption is a major contributor to the carbon footprint of capital markets firms. The rapid uptake of Generative AI(GenAI) and other frontier AI technologies is projected to disproportionately increase data centre power consumption. This will force firms to rethink their data centre and hybrid multi-cloud strategies.

Technology will be a critical enabler for a successful CSRD implementation as it is for all GRC functions. GenAI and LLM’s ability to process vast quantities of unstructured sustainability data and automatically match compliance obligations with impacts, risks and opportunities (IROs) for double materiality assessments will significantly boost efficiency and productivity for sustainability compliance.

The alignment between CSRD and the IFRS Sustainability Disclosure Standards, including the integration of Scope 3 emissions, reflects a global move towards more transparent and standardised sustainability reporting. The International Sustainability Standards Board (ISSB) has also included Scope 3 emissions in its climate-related disclosure requirements, emphasising the importance of these emissions in understanding a company’s overall environmental impact and climate resilience.

As companies navigate the CSRD and the data integration challenges of Scope 3 emissions, they are presented with an opportunity to lead in sustainability and transparency. By embracing the challenges of robust data management, advanced technology integration, and comprehensive governance frameworks, businesses can not only achieve compliance but also drive significant environmental and social impact.

The post The CSRD – Governance, Workflow, Data and Technology Impacts for 2024 appeared first on A-Team.

From next week, we will continue to provide our sustainability data and tech blogs, news and views through our core brands – Data Management Insight, RegTech Insight and TradingTech Insight.

It’s a bold move but one we feel reflects the changing nature of the ESG space as it moves into a new era of greater data reliance, artificial intelligence-driven processes and broader regulatory oversight.

Swift Development

Since the sustainable investment project went into full swing about a decade ago, ESG considerations have become firmly integrated in the data processes of financial institutions. This is a remarkable shift.

In the early days, traditional suppliers of financial data scrambled to put together the then niche non-financial datasets requested by investors who wanted to put their money into companies that made a difference to a warming climate and social ills. Their operations became more sophisticated as regulators began to promote and monitor these burgeoning sustainability markets.

Change hastened change and specialist data vendors quickly emerged, enabling firms to cherry pick datasets on the specific ESG factors that are most material to them. Now, AI is helping to refine research and operations, and more importantly, mine trends and patterns in data that can lead to better investment and risk decision making.

From the days of one-stop-shop providers, we now have innovative operators offering data on everything from corporate emissions, biodiversity and nature loss, through to human rights controversies and sanctions.

A New Venture

In 2021, A-Team Group established ESG Insight to reflect this fast-changing space.

In that time some of the toughest challenges facing the space have begun to be resolved.

• The International Sustainability Standards Board’s guidelines were announced, setting a path for the streamlining global reporting standards.
• The Sustainable Finance Disclosure Regulation and the Corporate Sustainability Reporting Directive in the European Union were implemented, creating rules that are expected to stimulate – and ensure the validity of – better and fuller ESG data disclosures.
• The application of AI has begun helping firms to extract more value from their sustainability data.

The challenges that faced ESG markets when we founded ESG Insight have changed significantly. And so it is time for A-Team Group to reflect those changes.

Shifting Priorities

Our polling has shown that, by a substantial margin, the challenges facing institutions have begun to shift. Data quality – and by extension, data sourcing – is still a tricky hurdle. But our most recent ESG Data and Tech Summit in London showed that its relative importance is waning as data gaps close and quality improves.

Firms are now focusing increasing attention on tackling the enormous data management and regulatory challenges that the sprawling ESG space has fostered. The volumes of unstructured data flowing into firms’ systems is expanding every day, putting strain on their technology setups and their newly established teams of data scientists. Regulatory compliance professionals are also under intense pressure to adopt new use cases and adapt existing processes to meet fast-evolving reporting requirements.

Fresh Approach

These shifting priorities mean that the task of reflecting this new phase of opportunities and challenges will be best served not through an ESG-specific lens but through one that takes a broader view of sustainability data’s management and its uses.

ESG has evolved into a business-as-usual part of firms’ operations. That isn’t to say it is no longer important. In fact, the opposite is true. Ten years ago, there was no ESG data. Now it is an integral part of the global financial system, helping to foster a sustainability market that estimated to account for around US$35 trillion of assets by the end of the decade.

By covering ESG within its wider data management context, A-Team Group is recognising that sustainability has properly “arrived” and that its coverage requires a more holistic approach.

The post Meeting the New Challenges of ESG Data and Tech appeared first on A-Team.

Two studies indicate that the gathering and dissemination of supply-chain emissions information will be a key part of ESG integration even though it has been relegated down the list of priorities by some governments and organisations, including the US.

SEC Pullback

Scope 3 emissions reporting has become a sore point since the US Securities and Exchange Commission (SEC) decided to omit it from the regulator’s sustainable disclosures rule. The SEC said that the US’ listed companies, which it regulates, are already required to report such details to other regulators, including those in California and the European Union. Compelling them to also report to the federal overseer would add unnecessary work on them, the SEC said.

A gnawing sense that the decision, announced in March, is emblematic of a broader step backwards in the sustainability movement was reinforced by a subsequent proposal by the Science Based Targets initiative (SBTi) to temper its own guidelines on disclosures.

Last month, the standards setter’s board of trustees said it had proposed a change to its rules on the treatment of Scope 3 emissions that would put greater emphasis on the use of environmental attribute certificates (EACs), documents that lay out a company’s emissions. EACs, however, have been criticised for enabling reporting firms to hide some of their environmental impacts. The decision ran into criticism from market participants and the SBTi’s own staff.

While many in the ESG space have welcomed adjusted approaches as acts of pragmatism, the recent research has highlighted a divide between officials on one side and markets and environmentalists on the other.

More Data

Research commissioned by the American Center for Audit Quality ****(CAQ) and Reuters show not only investor appetite for more supply chain data but also industry backing for its disclosure.

The CAQ sought the views of 100 institutional investors in the US on ESG data disclosures and the SEC’s decision. It found that 91 per cent of respondents said they thought Scope 3 emissions should be required from companies. Meanwhile, the Reuters survey of 3,076 sustainability professionals and practitioners across multiple industries ascertained that the proportion of companies that said they intend to report on Scope 3 – whether they need to or not – will more than double to 54 per cent in the next three years.

To be sure, Scope 3 is still in play in the EU’s green markets regulations, including the Corporate Sustainability Reporting Directive. And the UK’s yet-to-be implemented rules are expected to include supply chain emissions data disclosures. They are also expected to be included in sustainability reporting codes in Hong Kong, Singapore and a number of other states.

Nevertheless the sense of an ambition being lost is palpable among proponents.

The Institutional Investors Group on Climate Change has said that Scope 3 reporting is important because without it, “it isn’t possible to fully understand and assess its contribution to climate change”. And FTSE Russell, which operates the London Stock Exchange, has bemoaned the inconsistency and effectiveness of rules for reporting Scope 3 data, arguing that they give companies too much discretion to decide what data is – and isn’t – worthy of disclosure.

“Neglect”

Together, the CAQ and Reuters reports are likely to deepen a sense that Scope 3 emissions reporting is being deliberately pushed to the back of the shelf despite market wishes. This was reflected in an opinion piece in Energy Intelligence magazine, which this week condemned the SEC decision.

“Neglecting to include Scope 3 emissions in climate reporting standards is a significant oversight by the SEC,” the magazine wrote in an opinion piece. “It makes climate reporting incomplete, and thus misleading. It also weakens the motive for collective effort, which is needed to address global climate change effectively.

“Comprehensive, accurate reporting is essential for driving the large-scale changes necessary to reduce global greenhouse gas emissions. But the SEC’s exclusion of Scope 3 emissions from its climate reporting rule is more than just a regulatory oversight. It is a missed opportunity.”

The post Divisions Over Scope 3 Reporting Likely to Widen Amid New Data appeared first on A-Team.

This year’s awards included more than 30 categories ranging from Best Regulatory Reporting Solution for ESG to Best ESG Data and Technology Consultancy, Best Data Governance Framework Solution for ESG, Best ESG Solution for Unstructured Data, Best ESG Index Provider, Best Overall ESG data provider, Best Data Management Solution for ESG, Best ESG Fund Rating Data Provider, and more.

Andrew Delaney, President and Chief Content Officer at A-Team Group, said: “Congratulations to the award winners and thank you to all the vendors that entered A-Team Group’s ESG Insight Awards 2024, to our ESG Insight community that voted for its preferred solutions, and to our independent, expert advisory board that worked in collaboration with our editorial team to select this year’s winners.”

A complete list of winners and their solutions can be found in the ESG Insight Awards 2024 report.

You can find out more about A-Team Group awards, which also cover RegTech, Data Management and TradingTech, here.

The post A-Team Group Announces Winners of ESG Insight Awards 2024 appeared first on A-Team.

The Corporate Sustainability Due Diligence Directive (CSDDD) will enable firms to present information on the key environmental and social risks they face and help investors identify which are a better bet, said Alexandra Mihailescu Cichon, chief commercial officer for RepRisk. The regulation will also go some way to reducing environmental and social harms, Mihailescu Cichon told ESG Insight.

“For us, as a data provider who is focused on due diligence and focused on risks, our whole raison d’etre is to support organisations with due diligence, with better risk management, so we’re excited to see this coming into play in the market,” she said. “It will really shift the dial when it comes to reducing the adverse impacts on the environment and on society.”

Final Text

The CSDDD, the final text of which was approved last week, will require companies to seek information on the climate and human rights implications of what they do and the activities of the suppliers they work with. While financial institutions will only be expected to report on their own performances, non-financial firms will be obliged to seek information and engagement throughout their value chains.

The regulation is expected to work in concert with another EU rule, the Corporate Sustainability Reporting Directive (CSRD), which came into force at the start of the year and puts responsibility on more than 50,000 companies to disclose a wealth of ESG data. Together, it’s anticipated that the rules will hold companies accountable for their impacts and help investors build a fuller picture of the firms and assets in which they invest.

Controversy has surrounded the CSDDD after it was altered by drafters following interventions from France, Germany and Italy. They were concerned that the rule would place too many burdens on their companies.

The revised regulation, drawn up by Belgian diplomats, attracted criticism that it had been de-fanged. Research by the Centre for Research on Multinational Corporations (SOMO) suggested that the revised regulation would bring in scope just 5,421 companies, a huge reduction from the 16,389 that had been in the frame when the regulation was passed in December. In particular, the number of German firms included in the scope of the regulation was almost halved.

Resilience Boost

Business groups and environmentalists alike have criticised the changes. Eurochambres, which represents a broad span of European industries, said the regulations would affect the functioning of supply chains and erode members’ competitiveness. The World Wide Fund for Nature, however, said the rules didn’t go far enough.

Mihailescu Cichon said the negotiations that brought the CSDDD to be finally approved were part-and-parcel of the process of bringing change.

“There’s always spirited debate when it comes to regulation and we’re in a pivotal moment in the ESG space, because we’ve had the era of pledges and commitments, which has brought a lot of idealism, which is wonderful, and now we’re pivoting into this era of implementation and when you do that, things can get thorny, things can get complicated,” she said. “All in all, I think it’s a pretty good balance of ambition and pragmatism.”

Professional services giant Deloitte expressed optimism that CSDDD would boost corporate resilience, a point made also by Mihailescu Cichon.

“A company that manages its risk in a comprehensive and forward-looking way will lower its overall risk profile, will lower the financial risks it potentially faces, will lower its reputational risks, and now their own regulatory risk,” she said. “It makes companies in scope a more attractive investment for investors because the company will be able to perform not just today but will continue to be a viable investment over time.”

The post RepRisk Chief Hails CSDDD as Good for Investor Decision Making appeared first on A-Team.

Two reports this week suggest that one of the largest investment categories for financial institutions are finding it easier to obtaining the data they need to implement a robust sustainability strategy and that the importance of ESG to portfolio companies is increasing.

A survey of asset managers commissioned by S&P Global Market Intelligence found that ESG disclosures are becoming more standardised within private markets. That makes it easier for asset managers and investors alike to make allocation and risk decisions. The other report, commissioned by Workiva, concluded that many companies that fall outside the scope of a key piece of European regulation nevertheless plan to make disclosures in accordance with its framework.

Data Challenge

Private markets are an important part of the investment jigsaw for institutions, one third of whose capital is exposed to them. They have struggled, however, to assess the sustainability of portfolio companies because of an absence of data. The companies that are typically targeted by private market participants aren’t subject to rigorous reporting regulations. And the ESG data that has been available has tended to be patchy and biased towards the idiosyncratic needs of individual fund managers.

Nevertheless, many are deeply entrenched within global supply chains of listed companies that are required to make such disclosures. Consequently, these companies have been drawn into the regulatory data gathering and exchange operations of many public companies. Recent research indicates that this and other factors are providing asset managers with greater insights into private market sustainability.

“Practitioners are preparing for a market where assured integrated reporting is the de facto global norm,” Paul Dickinson, a member of Workiva’s ESG Advisory Council, wrote in the data company’s report.

Workiva’s research established that four fifths of companies surveyed for its “2024 ESG Practitioner Survey” that are not within scope of the EU’s Corporate Sustainability Reporting Directive (CSRD) intended to comply with it anyway. Stating that “integrated reporting is the new gold standard” the report also found that companies within and outside of the EU planned to abide by CSRD guidelines.

The report suggested that the reason for this was because companies realised that integrated reporting unlocks value. A similar proportion told surveyors that integrated financial and ESG data enables better decision-making “that can improve a company’s financial performance”.

Almost nine out of 10 said it would improve their long-term value creation capabilities. Encouragingly, almost all companies surveyed said they had confidence that their ESG data is accurate.

The growing importance of ESG to private markets and the financial institutions that invest in them has been highlighted by the emergence of products and services designed to help asset managers and portfolio companies. Among them, private market investor services company Apex Group acquired MJ Hudson’s ESG software and advisory team last year and sustainability consultancy Sancroft launched a free Investor ESG Toolkit for private equity firms.

S&P Global Market Intelligence has also brought together a slew of data management tools and expertise to target private market and ESG in investors.

Competitive Advantage

Companies’ positive view of the benefits of ESG reporting was also reflected in the S&P research, which focused on private market practitioners.

“Shaping Private Markets in 2024: Returns, Risk and Regulation” found that asset managers were drawn to companies that focused on ESG factors because they tended to have better access to finance and stronger risk-mitigation strategies.

“Key stakeholders, from investors to regulators, are demanding ever more transparency in this area,” the report stated. “However, many alternative asset managers also view ESG as an opportunity, providing the means with which to generate new value and secure greater competitive advantage.”

The study of 60 senior executives from alternative asset managers found that 91 per cent expect ESG issues to become more relevant over the coming year. Two fifths believe the importance of ESG will increase significantly.

Importantly, the report said that almost nine in 10 reported that ESG disclosures within private markets were becoming more standardised. Having a more homogenous reporting framework makes it easier for investors and asset managers to compare sustainability performances between companies.

“Disparate reporting methods have become a burden for everyone,” the report cited the CFO of an infrastructure asset manager in Australia as saying.

The post Data Suggests ESG Integration Burden is Easing in Private Markets appeared first on A-Team.

“ESG should never have been a special thing,” Nirav Shah, Senior Director of ESG and Quant Technology at JP Morgan Asset Management ****told ESG Insight ahead of the summit. “Being a special thing and the sudden urgency around it meant we made the sort of progress in four years that that we would normally have made in 10.

“Some of the hype around it is slowly dying, which is great and it is now becoming business as usual, which essentially means it’s just one of the things that investors look at,” Shah added. “That’s good for practitioners like ourselves, because the pressure’s reduced and also it’s being looked at in the right spirit.”

Fireside Chat

Shah’s views on the state of play within ESG will be the subject of the Practitioner Innovation Keynote Fireside Chat, which will kick off the May 16 summit in London’s Docklands district. He will be speaking with Priyank Patwa**,** director of financial services and ESG data analytics lead at Deloitte**.**

In what promises to be an engrossing conversation Shah will base his comments around the theme “Leveraging AI for ESG Insights”.

“To me, ESG is just like another financial risk factor; just like you would evaluate a company on its balance sheet and its ability to run a business, you would evaluate them to run a sustainable business in the sense that if there was a climate catastrophe would they be impacted or not?” he said.

High-Level Gathering

The third annual ESG Data and Tech Summit London will gather leading participants in the sector, including the financial institutions that are making sustainability-linked investment and risk management decisions.

Topics covered will include the evolving ESG regulatory landscape, the challenges in sourcing Scope 3 emissions information and the difficulties of managing enterprise ESG data. Keynote and panel addresses will also take a deep dive into subjects including AI and biodiversity.

On the development of AI in ESG, Shah plans to tackle the thorny matter of just how it can be best applied to managing data.

He argues that the core challenge to the ESG space remains the patchiness of the data record and that AI will go some way to alleviating the impact that has on institutions.

“AI has a lot to offer in this area in terms of the way it can overcome some of the problems inherent in the lack of data or lack of trustworthy data,” Shah said. “Not just that but it can also help in enhancing the productivity of our analysts to do research summarisation and going through large volumes of data and large papers, giving them succinct results that they can read through to form their views.”

While he conceded the technology is nowhere near able to fully automate those tasks for financial institutions, he said data providers have been busy putting in place the foundations for such development.

Year of Gains

Shah argued that despite the shortcomings still present in ESG data provisions, the situation has improved greatly over recent years with regulatory and investor demand resulting in the release of more and better data products and services.

“We hear a lot more about a new ESG data product than we would say four years ago,” he said. “So combination of regulations and companies’ increased willingness to disclose ESG data has meant that organisations like ourselves, which use data to make investment decisions, have a lot more to look at.”

• A-Team Group’s ESG Data and Tech Summit London will be held at Hilton Canary Wharf on May 16. There is still time to register for attendance. Just click here.

Views are my own and should not be attributed to JP Morgan Asset Management.

The post ESG Space Has Strengthened Under Pressure, Summit Lead Speaker Says appeared first on A-Team.

The Financial Conduct Authority’s (FCA) rule, part of its broader Sustainability Disclosure Requirement (SDR), expects companies to ensure that any sustainability claims made about their products “are fair, clear and not misleading”. The rules were completed in November and will also include frameworks on financial product labelling, which will come into force in July, and marketing.

The SDR has been drawn up to protect investors, especially in the retail sector, from sharp practices by organisations making sustainability claims that cannot be substantiated. But critics say there are grey areas and ambiguities in the guidelines that could leave market participants at risk of inadvertently breaching the code. In particular, NeoXam head of product and pre-sales for the Americas Yann Bloch drew attention to the volume of data that firms would have to gather.

“With portfolio managers now having to disclose any cash or derivatives they are using for liquidity or risk management purposes that do not directly contribute to their sustainability objectives, it will become even more important that they are able to provide regulators a breakdown of their whole portfolio makeups, and how each asset fits into how they market their funds,” Bloch said.

“This relies on being able to efficiently pull both financial and extra-financial information together into a regulatory report, which we know a lot of outdated legacy systems struggle with.”

Fair Markets

Jurisdictions around the world are putting SDRs in place to maintain the integrity of sustainability markets. Recent criticism of ESG investment processes have been fuelled in part by high-profile allegations of greenwashing by financial companies. Among them, Deutsche Bank’s DWS asset management business was accused by its parent group in 2022 of misleading investors in its ESG Climate Tech Fund.

The FCA said the need for its rules, which come into force on May 31, would be all the more important as the UK’s sustainable markets grow. The regulator cited its latest Financial Lives survey, which found that 81 per cent of adults questioned said they “would like their investments to do some good as well as provide a financial return”. The FCA estimates that there is more than US$18 trillion invested in sustainability-linked assets and financial instruments.

FCA director of ESG Sacha Sadan said implementation of the rules would be a milestone for green-market investors.

“Consumers care about investing in products that have a positive impact on the planet and people,” Sadan said. “That’s why we want to boost the integrity of the market and ensure people can make informed decisions with their money.”

Grey Areas

Nevertheless, some lawyers have said the wording of the rule is ambiguous and could lead to confusion. Its use of the term “financial products and services” was questioned by one legal expert in a report in IFLR magazine, who asked whether it applied only to regulated products and not unregulated products.

Another took a similar view to NeoXam’s Bloch, arguing that the definition of sustainability was vague and open to interpretation, meaning that compliant organisations would need specific expertise to evaluate data and assess changing market norms.

“This places a significant compliance burden on firms,” one lawyer was quoted as saying.

The post FCA Greenwashing Rule Raises Questions Over Data Requirements appeared first on A-Team.

Scope 3 data, which tracks the emissions of businesses within corporate supply and distribution chains, is now reported fully or in part by 42 per cent of global listed companies surveyed by financial data and index giant MSCI. The figure is 17 percentage points higher than in 2022 and all the more remarkable considering that few regulations yet demand the reporting of indirect emissions information.

Disclosures of data on Scope 1 and 2 emissions – those produced directly by companies’ own activities and the energy suppliers they engage – jumped 16 percentage points in the year to 60 per cent, according to the latest edition of MSCI’s annual “Net-Zero Tracker”.

Gaps Filling?

While gains were significantly lower among American companies, the report nevertheless said that gaps in the ESG data record might be narrowing. It said that corporate efforts, combined with the Securities and Exchange Commission’s newly formulated rules on climate disclosures, have the potential to ease data holes that are frustrating investors’ portfolio and risk management processes.

“The rules could help to narrow a global disclosure gap: Only 45% of US-listed companies currently disclose their Scope 1 and 2 emissions, compared with 73% of listed firms in other developed markets,” the report observed. “Though the rules would not require companies to disclose their Scope 3 emissions, the disclosures they do mandate could equip investors with much more information about financially relevant climate risks.

“That’s significant from a global perspective, as US-listed companies represent roughly two-thirds (63%) of the total value of global equity markets.”

SEC, CSRD

Regulators around the world are formulating rules to require corporate reporting of emissions data to help sustainability-focused financial institutions make better investment and risk management decisions.

While the SEC’s rule is halted in the courts, the European Union has pressed on with its Corporate Sustainability Reporting Directive (CSRD), which became law this year, and the UK’s Financial Conduct Authority (FCA) is expected to follow suit in the summer.

In response, data vendors including Bloomberg and Persefoni, have built tools to help financial institutions integrate carbon and emissions data into their processes.

The positive outlook for data gathering was underlined by a survey that showed most chief executives in the US expected to see significant returns from their sustainability investments over the next five years.

The latest annual KPMG US CEO Outlook Pulse Survey, which interviewed 100 corporate chiefs, found that “the execution of ESG initiatives remains the top operational priority for CEOs”.

“CEOs are going beyond checking the compliance box on sustainability,” said KPMG US ESG leader Rob Fisher. “They’re making it a core business imperative, leveraging cutting-edge data and AI capabilities to drive real-time strategies with measurable impact.”

Best, Worst

MSCI launched its tracker in 2021 to chart businesses’ progress towards their net-zero targets, as established in the COP28 summit held in Glasgow, UK. This year’s edition found that the proportion of listed companies that have set decarbonisation targets rose one percentage point to 38 per cent on 2022. A little more than half have disclosed an emissions-related commitment.

Data disclosure is most prominent among utilities and the mining and other materials industries, each of which saw more than 70 per cent of companies reporting emissions data. The consumer staples and energy sectors followed, with around 60 per cent of companies submitting their data. The lowest levels are seen among the financials and healthcare industries.

The post Emissions Data Disclosures Jump, MSCI Report Says appeared first on A-Team.