Industry

New Data Sources Key to ESG Fund Solutions 

Mandatory climate-reporting frameworks will standardise corporate disclosures, reducing reliance on third-party vendors.

New data sources are critical to asset managers’ response to investor demand for new sustainable products, according to Barclays’ second annual ESG investor survey. The bank asked over 250 respondents, primarily asset managers, to identify key ESG-related trends. The EU’s Sustainable Finance Disclosure Regulation (SFDR) and commitments to net-zero carbon emissions were highest on the agenda, the report noted.

However, a lack of standardised, transparent and forward-looking data from companies is making it more challenging for asset managers to fulfil SFDR requirements, develop new sustainable fund solutions and identify net zero-aligned assets, Barclays said.

SFDR’s data challenges 

Three-quarters of asset manager respondents said they plan to increase the percentage of their funds classified as Article 8 (promoting environmental or social characteristics) or 9 (having an environmental or social objective) under SFDR. This means that they will be subject to SFDR Level 2 rules from 1 July, 2022.

Level 2 principal adverse impact (PAIs) requirements ask asset managers to publish a quarterly statement on their websites, disclosing the impact of their investment decisions on 18 social and environmental indicators. This will require underlying data from all investee companies within SFDR-categorised funds.

“Lack of data is the clear winner in terms of the challenges associated with SFDR requirements; many of the data disclosures required under the Taxonomy reporting and Level 2 section of the regulation are not yet available in corporate disclosures,” Barclays said.

Asset managers continue to rely heavily on third-party data, but balk at the costs and opaque methodologies, which can make it hard to generate decision-useful information, the bank said.

Without improvements to corporate ESG-related reporting, it’s only going to get more expensive, Barclays warned.

Expenditure on third-party ESG data is growing annually by 20% and forecasted to approach US$1 billion by the end of this year, according to findings published by Substantive Research, an analytics provider for the buy-side.

As well as SFDR, the European Commission’s proposal for the Corporate Sustainability Reporting Directive (CSRD), formerly known as the Non-Financial Reporting Directive (NFRD), would require 50,000 firms to provide a non-financial statement on alignment with the Taxonomy Regulation’s environmental and social criteria from 2024.

Plotting a net-zero path 

Around 80% of survey respondents have already made, or are planning to make, a net-zero pledge.

However, “the question of how to put these commitments into practice is still being discussed, and a lot of work will be required from investors to identify net zero-aligned assets,” the report said.

Comprehensive forward-looking data is needed to ensure companies are truly in transition, Barclays noted. It was widely agreed by survey respondents that current data procured either via third-party vendors or direct from companies themselves is “inherently backwards-looking”.

Nonetheless, a number of investor groups, such as the Paris Aligned Investor Initiative, have proposed certain standards and frameworks for putting net-zero pledges into practice.

The Task Force on Climate-related Financial Disclosures (TCFD) also recently assessed current market developments for future-looking metrics, and is expected to publish finalised guidance this autumn.

Mandating standardisation

Data that is procured direct from companies is currently challenging to aggregate due to the lack of standardisation in disclosures, the report noted.

“Standardised ESG disclosures and financial impact information were the two key additions that investors wanted to see in the non-financial disclosures of corporates. We would therefore expect this to become a more important input over the coming year as we see continued work to standardise and make mandatory ESG data disclosures from companies,” Barclays said.

Policymakers are beginning to introduce such frameworks.

In the UK, all TCFD-aligned reporting will be a legal requirement for corporates and financial institutions by 2025. Across the pond, the US Securities and Exchange Commission (SEC) is expected to publish its finalised mandatory climate-related financial disclosure framework for US publicly-listed companies in October.

As part of its Sustainable Finance Strategy, the European Commission has further announced plans to introduce measures that improve the reliability, comparability and transparency of ESG ratings, expected by Q1 2023 at the earliest.

The Board of the International Organisation of Securities Commissions (IOSCO) published a public consultation to address ongoing issues with ESG data relevance, reliability and comparability.

The consultation closed on 6 September, with finalised guidance expected in due course.

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