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ESG data faces huge challenges

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Constantly evolving ESG data is the biggest challenge for financial firms in Europe, according to Bloomberg research.

More than two-fifths (41 per cent) of financial market participants in London, Stockholm, Geneva, Amsterdam, Frankfurt, Paris, and Milan, say processing new sustainability information is problematic.

This challenge is compounded by the fact that complying with ESG regulations was respondents’ biggest data challenge. More than a third (35 per cent) of firms reported that fulfilling regulatory requirements was the highest priority for accessing ESG data, followed by meeting climate risk and net zero objectives (18 per cent).

The problem stems, according to the research, from “coverage and quality issues with company-reported ESG data”, which was cited by 63 per cent of respondents as their biggest concern. 

One-quarter of firms surveyed say linking ESG data content to existing entity and instrument data is a problem along with meeting reporting requirements (18 per cent) and managing multiple ESG vendor feeds (16 per cent). 

Nadia Humphreys, Head of Sustainable Finance Data Solutions at Bloomberg, says that the EU’s Corporate Sustainability Reporting Directive (CSRD) in the EU, should “increase the quantity and quality of company-reported ESG data over the coming years”, but she notes that with this increased availability, “the need for seamless integration and management of this data will become more pressing, or risk slowing investment decisions”.

“While quality and comparability remain a global challenge, data management is coming into sharp focus for firms in Europe. If firms cannot organise their ESG data, they cannot effectively make decisions using that information,” Humphreys says.

The survey findings match similar concerns shown by European financial regulators in the past week.

Research from BaFin, the German financial watchdog, reveals that many asset management companies are “not satisfied with the ESG data and ESG ratings currently available on the market”.

Thorsten Pötzsch, BaFin’s Chief Executive Director for Securities Supervision and Asset Management, says: “The available ESG data and ratings still show substantial shortcomings. This is an area where I see greater transparency as crucial. The data and rating providers should more carefully explain how they draw up their assessments, which data sources they use and how they deal with gaps in their ESG data.”

Pötzsch says greater ESG data clarity and consistency is in the pipeline via the forthcoming European data portal ESAP, which requires companies to provide their sustainability data in a standardised format.

He adds: “In a draft regulation on ESG ratings, the European Commission addresses several other problems highlighted in our study. For example, it aims to improve the quality and integrity of ESG ratings, to increase transparency regarding the underlying methodology and to prevent conflicts of interest. I think these are good steps in the right direction.”

While they await such regulation, Pötzsch advises asset managers not to apply data or ratings without careful consideration.

“The companies need to understand what ESG data and ESG ratings represent and what they do not, since no market standard has been established yet.”

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