UN-backed body identifies main obstacles for ESG data, plans to engage with regulators

Group includes Refinitiv, Climate Bonds Initiative and the Asia Securities Industry & Financial Markets Association

Influential financial trade bodies, data specialists and public entities, backed by the UN, have laid down their plans to push for better ESG data globally, and will step up their engagement with regulators on the topic in 2021.  

The Future of Sustainable Data Alliance (FoSDA) was launched in January with an ambition “to solve the question of what data investors and governments need to meet the 2030 climate targets”. Founding members include the UN, Climate Bonds Initiative, World Economic Forum, the Institute of International Finance, the Official Monetary and Financial Institutions Forum, Tsinghua University, the Asia Securities Industry & Financial Markets Association, FinTech4Good, Everledger, the Institute of Public and Environmental Affairs, Spatial Finance Initiative, Bank of Africa-BCME and GoImpact.

The group says it consulted with the market throughout 2020, and has come up with seven recommendations to develop best practices around ESG data, which will form the basis of its work in 2021.

The recommendations include the need for missing datasets to be identified and addressed.

“98% of Global Institutional Investors take ESG and sustainability data into consideration when deciding to invest in a company,” said Sherry Madera, Chair of FoSDA and Chief Industry & Government Affairs Officer at data company Refinitiv. “Yet nearly 83% cite data as the obstacle to effective assessment. This needs further work to identify where data needs are well defined and need to be populated – a data gap – versus blank spaces where data is not yet available – a data hole.”

The group identified biodiversity as the first “data hole”, calling for regulators, data providers and investors to collaborate to establish the necessary datasets required to assess risks.

“No matter what policy is implemented, without the data, there will be no adequate progress in this area,” it said, suggesting new reporting requirements and the use of geospatial data as possible solutions to the current lack of biodiversity information.

FoSDA also calls for a move away from “binary disclosure on ESG issues” – reporting requirements that simply require entities to confirm whether or not they have policies in place for water management or deforestation, for example. “Such datasets bring little value to financial risk assessment and decision-making,” the report states. This trend could be bucked in the EU by the upcoming revision to the Non-Financial Reporting Directive, but more broadly regulators should require disclosure to use metrics, rather than ‘yes’ or ‘no’ answers, the group says, acknowledging that the cost and time required to produce improved data must be spread across stakeholders.

The report notes that, to minimise the reporting burden and avoid confusion, the existing work being done on ESG data and disclosure should be brought together.

“The ongoing IFRS Foundation workstream on a possible move towards a global non-financial reporting standard setter and the efforts being made at the EU level to move the debate surrounding standards are particularly welcome,” it said, urging the Foundation to work with data companies and other standard setters to speed up the harmonisation of ESG standards. Likewise, it calls on regulators and data providers to team up during the development of taxonomies – lists of credible sustainable assets or business activities – to ensure the data is available to comply with any regulation that might accompany such frameworks.

Regulators, including central banking group the NGFS, are urged to focus on forward-looking data such as scenario analysis in their requirements for financial institutions and companies. Asset level data from alternative sources, including location and spatial data, should also be promoted, it said.

Finally, FoSDA said that market feedback had highlighted a lack of experienced talent around ESG data. It said education programmes and capacity building are needed, and governments should consider supporting qualifications and subsidies in the area to help grow the pipeline of specialists.

The next step for the group is to put together a “roadmap” outlining concrete actions it will take to push the recommendations forward.

“FoSDA will engage with global regulators to help identify data sets that are available and those that might be needed, in order to gauge the availability of adequate ESG datasets needed to ensure compliance with ESG regulatory requirements,” it said.