What will new ESG regulatory focus mean for data management?

The incorporation of environmental, social and governance (ESG) factors into the investment process is one of the hottest trends of recent years. However, standardization and regulation of ESG have not kept pace.

ESG standards have typically been set by non-governmental organizations (NGOs) and industry associations, with no single, accepted framework for evaluating and comparing assets. The industry has also relied on often opaque scoring mechanisms to assess the ESG credentials of assets.

This lack of consistency and transparency has diluted the trustworthiness of ESG as a category, leading to accusations of 'greenwashing' in some quarters. However, the tide is starting to turn, as regulators focus more on ESG.

In Europe, the European Securities and Markets Authority (ESMA) is prescribing standardized ESG disclosure and investment practices. Meanwhile in the US, the Securities and Exchange Commission (SEC) has published initial guidance aimed at improving transparency for investors and credibility for the industry. For example, it has proposed that asset managers should document the processes used to generate scores, perform proxy voting and notify the board of any disagreement with a decision.

The development of these more prescriptive disclosure requirements raises questions about the way financial firms collect, aggregate and contextualize their ESG data. Firms will need the flexibility to roll data up to present the big picture; break it down to show how the evaluation was calculated; and set rules about what to include and exclude in their scoring. Above all else, they will need to be able to annotate specific data points and ensure that the notations track through to any report in which the data is cited.

Given the wide range of ESG metrics required to meet the requirements of regulators and investors, there is a growing need to collect and manage the data using a strategic data management and warehousing solution. This allows asset managers to aggregate data from a range of sources and link these metrics with related investments and financial entities, as well as integrating ESG factors into their current and historical portfolio reports.

Critically, to keep up with increased regulatory scrutiny, firms need flexible disclosure functionality that enables them to append notes to data and create disclosure statements that can be automatically presented to external parties. This is what we offer with EDM Warehouse, our buy-side reporting solution. We give users that ability to bind notes to their data so that if they run multiple reports, a correct and complete set of disclosures will appear in every version. This allows users to define, set and modify rules about what to include or exclude in disclosures and specify the inquiries, accounts, funds and instruments in which they need to appear.

As more robust and granular ESG reporting methodologies are rolled out, the ability to manage and contextualize the underlying data will become a critical capability. Leveraging a strategic data management and warehousing platform with integrated disclosure management will help financial firms keep up with rapidly evolving regulatory and investor expectations.

Find out how we are helping financial firms manage their ESG data here.

Read our ESG data management client case study about Mirabaud Asset Management here.