Climate change and an increasing demand for action on social and ethical issues has made sustainable investing, and ESG as a whole, a top priority - while shaping the way companies do business around the globe. Regulators are expanding their focus on incorporating sustainability into investment decision making, but lack of consistent and robust data remains one of the biggest challenges facing asset managers.
ESG and building an ecosystem of sustainability: summary
During an interview at IMPower Incorporation FundForum 2022 in Monaco, Alexander Stevens, CEO at Greenomy, Vincent Clause, Global Head of Funds Services at Euroclear and A.J. Harper, Head of Sustainable Finance, ETF’s & Asset Managers at Euroclear took a deep dive into the issue and explained how the MFEX by Euroclear-Greenomy partnership enables asset managers to adhere to the European ESG Template (EET), further strengthening the data solutions capabilities and value propositions Euroclear group offers to asset managers and funds distributors.
The EU’s Sustainable Finance Disclosure Regulation (SFDR), the EU Taxonomy and the European ESG Template (EET) all aim to increase market transparency in standardised ways and direct investors towards a huge amount of data to be gathered on underlying investee companies. This data is currently difficult to find, inconsistent and often inaccurate. The challenges of compliance are significant.
As Alexander Stevens, CEO at Greenomy, commented during the interview, “the big problem is a need to go fetch the data from the different investees within the portfolio. The regulator/legislators are requiring reported data to be used instead of proxies or estimates so how can you make sure your investees have provided the correct information?
With the current ESG reporting rules, over 6,000 financial institutions need to produce mandatory EU Taxonomy reports. This will grow by another 50,000 corporates in 2023 and over 2 million by 2026, as more companies including SMEs will need to conduct mandatory EU Taxonomy screening. In response to the challenges of incomplete or incorrect data, there has been an overwhelming proliferation of platforms providing ESG solutions, but a key criticism is the usability and reliability of the data and a lack of transparency on methodologies.
According to A.J. Harper, Head of Sustainable Finance, ETF’s & Asset Managers at Euroclear, when it comes to data there are three words that ring true, ‘trust, transparency and scale’. “First of all, people want to know what’s on the tin is backed up by what’s inside the box. Secondly, people talk about ‘look through’, understanding what the underlying investments are. Lastly, people feel overwhelmed by the amount of data and analytics, and there needs to be a streamlining and scaling at the same time, as that’s easier for practitioners and asset managers”.
Vincent Clause, Global Head of Funds Services at Euroclear, added “There is a need for the market to create transparency through data. At the end of the day it’s good to have good data, but we need to make sure it’s available to the investor. Ultimately, we have to make sure the investor sees it”.
Sustainable finance is fragmented globally as each country adopts its own green taxonomy, with around 35 in place so far. Although there is a 70-80% overlap across the various taxonomies, this leaves a 20-30% discrepancy to be addressed. The difficulties of getting consistent, standardised ESG data, will take time to be resolved and a flexible approach will be needed to keep up with rapidly changing requirements.
Greenomy will leverage its data gathering expertise and will codify the numerous national taxonomies onto the Greenomy platform as they are published, match discrepancies, find equivalences to create interoperability. This means an issuer anywhere in the world can submit their data, and Greenomy will match it to the various frameworks, enabling local asset managers globally to be able to invest in a streamlined and effective way.
The seamless and user-friendly ESG reporting solution now offered by MFEX by Euroclear in partnership with Greenomy enables asset managers to adhere to the European ESG Template (EET), further strengthening the data solutions capabilities and value propositions Euroclear group offers to asset managers and funds distributors.
Vincent Clause, summarises “We have a virtuous cycle between the three entities, Greenomy with the creation of the data, Euroclear the infrastructure and MFEX by Euroclear the access to investors”.