Solving the data quality challenge as ESG investing surges ahead

While investing with an ESG focus presents a huge opportunity, it also presents a significant challenge. Consistent and quality data is at the forefront of this challenge. Coupled with increasing guidelines and regulations, obtaining an accurate picture of ESG investments remains a tortuous journey. In this environment, it is important to be informed writes Philippe Tassin, Head of Asset Owner and Manager Client Lines APAC, at BNP Paribas, following his recent panel session at the Fund Business Investment Data & Technology Summit in Australia.

Global environmental, social and governance (ESG) assets are forecast to exceed US$50 trillion by 2025, representing more than a third of the $140.5 trillion of total global assets under management.  

Evaluation of ESG factors, where the ‘E’ represents areas such as energy, climate risk, biodiversity, water, waste, and pollution; the ‘S’ covers areas such as human rights, consumer protection and workforce related rights; and the ‘G’ comprises issues including board independence, business ethics, anti-bribery, and top executive remuneration, is now recognised as an increasingly important investment input around the globe. 

Furthermore, a BNP Paribas ESG survey conducted in 2021 confirmed the main reason for integrating ESG into portfolios is reputational and brand risk, overtaking returns as the primary ESG driver and signaling the growing importance of ESG as a societal issue. 

Attaining consistent and quality data, though, continues to be the number one challenge and a key barrier to ESG integration. At present, there are still no universal reporting standards and data sets can be highly varied. 

ESG and regulation driving change in Australia

Europe has long been a pacesetter in terms of ESG regulation. The European Sustainable Finance Disclosure Regulation (SFDR) is now in its next phase with the aim of improving comparability between ESG investments by prescribing standardised disclosure metrics. Taxonomies are being developed which offer a classification of activities and assets with the aim of fighting greenwashing and further clarifying the path to transition. 

Climate change regulations are also touching financial institutions and listed companies throughout Europe and the world in line with guidelines supported by organisations such as the Task Force on Climate-related Financial Disclosures (TCFD). 

Local asset owners and asset managers in our industry recognise that we are in an increasingly interconnected global investment market.  ESG regulatory developments in Europe, in particular, often flow to local markets such as Australia and the Pacific region. For example, SFDR appears to be driving standards beyond its home jurisdiction – and will soon impact investors here in Australia. 

“As the foremost and only European-heritage custodian in the local market, we are well positioned to keep abreast of these trends and provide a leading position on what we expect will impact the operations of local asset owners and managers here, both now and in the future.” 

says Philippe Tassin, Head of Asset Owners & Managers Asia Pacific

We are constantly scanning the horizon with respect to ESG trends, adopting a forward-looking approach rather than a reactive one. Our European heritage also means we are on top of upcoming changes to the European Commission’s Sustainable Finance Action plan and can report in a timely way on key milestones.

Building structures and frameworks

In response to such regulatory change, we are building data structures and frameworks, ensuring we are agile, adaptable, and globally scalable for all regulations. ESG is also a part of our culture via mandatory training for our own staff, including objective setting, and the solutions we develop for our clients. 

We hold regular ESG-related regulatory briefings with our clients, thought leaders from the industry, and have a structured regulatory programme in place to keep our clients up to date on upcoming changes and what they need to do to meet new requirements. BNP Paribas’s Securities Services business line is working with local regulators and other organisations in this respect.  

We also continue to monitor upcoming deadlines such as non-financial undertakings, involving the disclosure by entities of information on the proportion of the turnover, capital expenditure and operating expenditure of their activities related to assets or processes associated with environmentally sustainable economic activities.  In addition, over the next few years, the will be a need for financial undertakings such as asset managers, credit institutions, and investment firms to comply with detailed disclosure obligations.  

While APAC disclosure guideline or regulation do not incorporate any direct penalties for non-compliance now, over the next few years, the need to comply with detailed disclosure obligations is likely to become mandatory. For example, the Australian Prudential Regulation Authority released the Prudential Practice Guide CPG 229 Climate Change Financial Risk with updated reporting standards last year. In addition, a number of regulators across the region are starting to launch disclosure reporting regulations. New Zealand, for instance, is the first country in the world to pass a law to require financial organisations to disclose climate-related risks.

Tackling data challenges

There are numerous initiatives around the world striving to resolve ESG data challenges. In Europe, the EU taxonomy and SFDR is aiming to address this with respect to sustainable investments.  While in Australia, there is no such targeted regulation in place yet, the market regulators are paying close attention and have been providing ongoing guidance – the recent Australian Securities and Investments Commission guidance on avoiding greenwashing in investment products1 being a case in point. Likewise, the Australian Sustainable Finance Institute – a financial services market driven initiative - has embarked on a project developing an Australian taxonomy for sustainable investments aiming to agree on a common language in sustainable investing.

One of the main challenges is that there are many initiatives trying to achieve similar objectives, but with different requirements. While the intentions are well meaning, there is the risk that instead of simplifying the ESG framework, it creates further complications and introduces a degree of red tape and costs.

“One of the main challenges is that there are many initiatives trying to achieve similar objectives, but with different requirements. While the intentions are well-meaning, there is the risk that instead of simplifying the ESG framework, it creates further complications and introduces a degree of red tape and costs.” 

Says Tassin

Asset owners and managers, here and overseas, are tackling data challenges in different ways. Some use multiple data sources where they compare and find denominators or alternatively, identify a single classification of source of truth. As an example, 73% of the asset owners and managers BNP Paribas surveyed as part of its ESG research declared that they use three to six sources. They use processes to ensure data transparency and how each rating is produced and by whom. For advanced data quality, firms tend to do their own internal research, develop proprietary scores and in doing so, leverage their in-house technology. 

Harnessing insights from data

At BNP Paribas, our ability to harness insights from data is a key point of differentiation. We have launched our open-architecture ESG platform Manaos*, which connects institutional investors and asset managers to the market’s leading ESG data vendors and service providers. With the growing need for organisations to use different sources to comply and monitor with ESG standards, Manaos offers an ‘app store’ like experience where clients can assess the sustainability of their portfolios across a range of use cases and methodologies. Manaos is adding new data providers every quarter and currently has more than 30 applications live on its platform, with more on the way. 

We also have specialists in the region dedicated to ESG and are one of the first in Australia to provide DaaS – cloud-based software tools used for working with data.

In the meantime, we have enhanced our front-to-back solution with the ability to provide custody servicing execution including back office, middle office, collateral management, and reporting services. We have built additional dealing services desk in Hong Kong to meet the growing demand from asset managers to optimise the execution of their market transactions in the region. This is helping Australian clients to focus on entering new markets and asset classes, such as private capital and other unlisted markets and their measurement, which BNP Paribas also supports.

Committing to ESG

With so many ESG regulatory changes and developments in train, BNP Paribas is reaffirming its commitment to the local market and continues to be a world-leader in ESG data management. With more regulation likely ahead, it is critical that Australian fund managers continue to keep in mind upcoming changes. At the same time, companies recognise that adopting ESG processes is more than just box-ticking and is essential for bolstering their reputations and enhancing the relationship with their own stakeholders. 

 ESG Assets Rising to $50 Trillion Will Reshape $140.5 Trillion of Global AUM by 2025, Finds Bloomberg Intelligence | Press | Bloomberg LP

2 Taxonomy — ASFI

* Manaos is a BNP Paribas platform in a separate legal entity – 100% owned by BNP Paribas Securities Services.

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