How the financial services industry can ensure a successful ESG data programme
Key challenges include sourcing ESG data and greenwashing.
Implementing ESG policies is one of the ways for businesses to attain a sustainable economy, but its impact is measured as a tick-box, instead of “a corporate purpose in line with social and environmental prosperity,” according to Baringa.
In a report, Noelle Greenwood, an expert in climate and ESG in financial services, and Lutamyo Mtawali, Climate and sustainable finance expert at Baringa, said the use of ESG data in the financial services industry is currently following a “dangerous trend” wherein it is not measured without a “defined purpose and strategy.”
The industry’s nascent ESG data system is also anchored on inconsistent standards and methodologies, resulting in three key challenges which include difficulty in sourcing ESG data. There are also data gaps in the areas of biodiversity, resource depletion, circularity, and social impact because of non-standardised and regionally concentrated standards for reporting.
Baringa also noted the challenge of oversimplification as ESG factors are clustered into single data points. Variations between ESG ratings amongst providers indicated that ratings lack the vital data on underlying environmental and social capital, which enables “trade-offs between real-world sustainability impact” to be overlooked. The industry is also facing a hurdle in greenwashing schemes.
“Amidst widespread gaps in data and capability, increased risk from greenwashing or ‘sustainability-washing’, it is no longer feasible for financial institutions and their clients to ‘do’ ESG as a tick-box exercise,” the report read.
“This means that the misuse and misrepresentation of ESG data create a risk for users, underlining the need to develop credible solutions to measuring ESG outcomes backed by purpose,” it added.
For successful ESG data programmes, Baringa cited four principles.
First, financial services should utilise a corporate purpose to identify the scope of the ESG impact. Having a purpose enables businesses to assess ESG factors relevant to them and use them to inform data requirements/
“The principle here is taking a focused approach to measuring impact and accepting the inevitability of data gaps and trade-offs between ESG factors with a clear strategy to navigate these,” Baringa said.
Second, organisations should have a data architecture that will cater to purpose and ESG requirements. Having a “fit-for-purpose” ESG data set aligned with the requirements and the firm’s purpose, and a data framework will identify the trade-offs between ESG factors and key data gaps, together with a strategy for resolution.
It added that ensuring that data availability and data quality meet business requires sustainability capability in all functions so the right information is sourced and utilised.
Third, financial institutions should engage clients on sustainability as this will improve their ESG data ecosystem.
Lastly, they should “foster appropriate government of sustainability,” Baringa said, noting that governance is the core of the development of purpose for sustainability and ensuring this will apply across operations.
Governance functions, which include engaging with internal employees and building partnerships, play a key role in building internal capabilities “to recognise and reconcile the data gaps and tensions that emerge in ESG factors.”
