Environmental, social and governance (ESG) reporting is becoming increasingly important for financial services companies around the world. The pressure to disclose ESG-related data is mounting, with investors demanding more transparency and regulators enforcing new reporting standards. Here are just a few examples of the new regulatory environment that financial services companies must navigate:
- The EU’s Sustainable Finance Disclosure Regulation (SFDR)
- The UK’s Task Force on Climate-Related Financial Disclosures (TCFD)
- The European Parliament's Corporate Sustainability Reporting Directive (CSRD)
- The US Securities and Exchange Commission ESG reporting proposal
To comply with these regulations, financial services organizations need to treat ESG reporting with the same rigor as traditional financial reporting, where ESG data and reporting has the same level of controls as financial reporting does. As a case in point, when it comes to verifying financed emissions (also called Scope 3 Category 15 investments), companies need to report on the carbon footprint of their investments.
Take also the example of S&P 500, which is an index fund. Financial services companies need to be able to calculate the carbon footprint of their investment in this index fund. Performing this task is a tremendous data collection challenge. ESG rating agencies are often leveraged to assist with the endeavor. A data strategy is required to manage this third-party ESG rating agency data, as well as a myriad of internal data, for accurate ESG reporting. Companies must also develop a data governance strategy to ensure the underlying data used to analyze ESG performance is auditable and verifiable. Failure to do so can result in regulatory fines, reputational damage and increased regulatory scrutiny.
Regulators expect the same standards of quality and governance to be applied to third-party ESG data, requiring clear data sources with transparency on methodology and calculation of metrics. Companies must also consider measuring Scope 3 carbon emissions generated across their supply chains, responsible sourcing, and human rights conventions in their treatment of employees and contractors.
ESG reporting is just the tip of the iceberg where, on average, 20% of the effort lies. It is beneath the surface where 80% of the effort is needed. This weightier undertaking involves ensuring that the data being reported on is accurate. There must be transparency, governance and traceability (data lineage) beyond the ESG reporting layer. Systems and applications must demonstrate the presence of these controls that are expected by regulators. For example, financial services institutions need to demonstrate principles of BCBS 239 for ESG data.
To address ESG data management challenges, financial services companies can turn to a combined approach like the Microsoft Intelligent Data Platform with the Informatica Intelligent Data Management Cloud™ (IDMC). These two platforms can consolidate virtually all third-party ESG rating agency data and internal ESG data to provide powerful and comprehensive ESG reporting and analytics capabilities. By leveraging their joint capabilities, financial services companies can achieve the insights, agility and business outcomes necessary to succeed in their ESG compliance initiatives and beyond.
To get more details on how we can help, read our joint Microsoft and Informatica insights paper, “How to Accelerate ESG Reporting in Financial Services with Intelligent Data Management Cloud.”