As the next phase of SFDR disclosure begins, January 2023 marks
an important milestone in the regulation of ESG in the EU. With the
SEC, HKEX, SEBI and other regulatory bodies around the world also
considering similar measures, we appear to be at the start of a
significant global effort to increase transparency into the
sustainability of financial products, prevent greenwashing and
empower investors to compare products based on sustainability
Most asset managers and other buy-side firms have been busy
preparing for SFDR reporting for many months. As they and their
service providers have gone through the process of translating the
requirements into tangible operational steps, there are a number of
takeaways worth noting as they will be instructive for future
rounds of SFDR reporting and the potential roll-out of similar
regulations in other jurisdictions.
One of the big challenges of SFDR is data management. Buy-side
firms must classify their investments based on the
EU’s criteria and then make detailed disclosures at both the
product and entity level. In many cases, firms do not currently
capture the required data (such as principle adverse indicators,
PAIs, which show how investment decisions may negatively impact
sustainability factors). As a result, they are starting to expand
their due diligence processes to incorporate ESG considerations.
Asking the right questions now will be helpful not only for SFDR,
but also for compliance with future requirements.
Of course, the challenge is not limited to data capture. Even if
data is available, it is likely to be siloed, maintained in
different formats and varying in quality.
Recent research by InvestOps found that 30% of buy-side firms
do not yet have a solution for integrating the ESG data they
consume from multiple sources. Some firms may hope to complete
their initial SFDR reporting using manual or semi-automated
processes. However, the large volumes involved (spanning thousands
of fields per investment) mean this is likely to be untenable for
most in the long term. To truly operationalize SFDR reporting and
avoid tying up resources, firms will need to automate the data
collection, validation and reporting processes. This will also help
reduce operational risk and deliver high-quality disclosures.
Private assets and proxy data
As many on the buy side expand their exposure to private
markets, they face particular challenges due to the lack of
available data for alternative assets. While proxy data can help
build out initial internal processes and align to internal
reporting frameworks (
32% of those surveyed by InvestOps said they will take this
approach), firms will want to find long-term solutions to
replace it with data sourced directly from private companies.
Flexibility and scalability
Detailed reporting rules have been defined for this phase of
SFDR disclosures, however, determining the threshold for quality
data will be challenging. This is true for ESG more broadly due to
the lack of a universal, global standard.
In this evolving environment, it is especially important for
firms to have the flexibility to re-evaluate and optimize their
compliance with ESG regulations as part of an iterative process.
There is a need for robust data management – both across public and
private markets – and this will continue to evolve as firms adapt
to regulation. It is important to take time to understand whether
your processes and systems for SFDR will offer both the flexibility
and scalability to support compliance with similar requirements
that are under consideration in other jurisdictions.
We are in the early stages of developing more transparency and
consistency across ESG data. By thinking ahead and learning from
the experience of SFDR, assets managers and others on the buy side
have an opportunity to reap significant efficiency benefits in the
Download the full InvestOps white paper:
How the buy-side is utilising data and technology to integrate ESG
and optimise business growth in 2023
Posted 19 September 2022 by Alex Merola, Executive Director of Commercial Strategies, ESG & Private Markets, S&P Global Market Intelligence
IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.