The ESG revolution will only happen with reliable data

Environmental, social and governance (ESG) data needs to be tested in order to be disseminated in a uniform manner.  Conversely, unreliable data slows down the sustainability transition in the financial sector. Photo: Shutterstock

Environmental, social and governance (ESG) data needs to be tested in order to be disseminated in a uniform manner. Conversely, unreliable data slows down the sustainability transition in the financial sector. Photo: Shutterstock

There is no shortage of ESG data. However, the quality and granularity of this data is regularly lacking, making it difficult for asset managers to implement the growing regulatory framework.

The post-summer recovery of the financial sector was expected to be marked by numerous regulatory issues. In particular, the new Mifid rules require the investment industry to be aware of clients’ preferences on sustainable finance, as of 2 August. Based on their clients’ profile, fund distributors must be able to offer them either ‘green’ funds according to article 8, ‘dark green’ funds according to article 9, or ‘brown’ funds according to article 6 under the EU’s Sustainability Finance Disclosure Regulation.

More than a month later, the implementation of the new know-your-client rule still seems to pose some problems for many asset managers and private bankers. One reason is the lack of reliable data on the assets covered.

The challenge is not so much the existence of data, but rather its quality and granularity. Data is at the very heart of the ESG analysis process. Especially since the complexity of the analysis requires a multitude of indicators, much more so than for traditional financial analysis.

Faced with the difficulty of collecting reliable data reported by the companies themselves, managers sometimes fill in the blanks with data collected by their own means, thereby increasing the hours of work required to achieve a result. Others prefer to use third-party data providers, often supplying only a single ESG score on a company. As Nicoletta Centofanti, general manager ad interim of the Luxembourg Sustainable Finance Initiative, has noted, these providers need to be more transparent about their methodology, providing sufficient comfort and assurance to asset managers.

Not to miss out on sales opportunities

As ESG rules are rapidly gaining in importance, particularly in the fight against greenwashing, they are now becoming more and more like traditional compliance areas. Given the complexity of these matters, leading financial institutions are recruiting data analysts to support compliance teams.

The European regulatory agenda for ESG products is still in its infancy, with legislative adjustments planned until at least 2028. The urgency for reliable data is therefore growing by the day. For their part, the supervisory authorities are preparing to launch their first audits.

If Luxembourg has been positioning itself for years as a pioneer in sustainable finance, the management of investment fund data represents an immense potential for the Luxembourg financial centre. Data is the new oil, Bob KneipBob Kneip said in June, following of the sale of his company Kneip SA, which specialises in fund data management, to Deutsche Börse Group.

“It took a lot of stones to build the edifice that the Luxembourg financial centre has become. Data contributes to the development of this ecosystem,” Kneip stated, insisting on the importance of testing data so that it is disseminated in a uniform manner.

A sound requirement that should also apply to ESG data. Not to mention that “the stakes are even higher because if industry players haven’t taken good care of their data, they won't know how many sales opportunities they may have missed.”

This editorial was published for the Paperjam + Delano Finance newsletter, the weekly source for financial news in Luxembourg. Subscribe using this link. Read the original version in French on the Paperjam site.