At Cognizant, we see that to improve ESG disclosures and investment decisions, financial services firms need to develop an effective data management strategy with these four components.
A recent survey by professional services firm Marsh McLennan found that while 80% of financial services respondents said ESG was a top concern, only 42% had an effective process in place to identify, respond to and implement changes based on those concerns.
What’s stopping them? Commonly, it’s the lack of good data – and sound data management. This is true for everyone from bank executives struggling to streamline ESG reporting, to asset managers trying to leverage financial services ESG data for investment decision-making.
According to an EY survey, fewer than half (46%) of investors surveyed had a fully deployed and sophisticated approach to ESG data management. The majority (75%) plan to significantly invest in data management and sophisticated analysis tools, yet in our experience, few seem to know where to begin.
Data management: core to financial services ESG
To improve ESG disclosures and investment decisions, financial services firms need to develop an effective data management strategy, including four key components:
- Identify the right metrics
Identifying a comprehensive set of ESG metrics, relevant to the firm’s industry, is key. For businesses, we encourage reporting on the core metrics recommended by the World Economic Forum. For asset managers, we encourage the use of a variety of ESG metrics to meet the needs of a responsible investing business. Also, develop a two-way communication channel with a diverse group of stakeholders to inform the relevant metrics
While asset managers are bound by regulatory requirements and client mandates, businesses have more flexibility to choose which ESG reporting standard(s) they’ll adhere to by studying their stakeholder requirements. For example, frameworks such as CDP, TCFD, ISO, UNPRI are industry-specific, whereas other frameworks, such as GRI and the United Nations’ Sustainable Development Goals, are industry-agnostic and cover a wider range of ESG issues.
- Select the right data provider(s)
KPMG estimates there are 160 ESG ratings and data providers worldwide, which makes selecting one a daunting challenge. The key to accurate assessments is to combine both generalist and specialist ESG data providers. This helps ensure both sufficient data coverage and customizable data models that match your unique ESG metrics.
- Validate data quality and fix gaps
To ensure ESG data is complete, organizations should validate that its quality, availability, relevance and underlying methodology are all sufficient, and be transparent when any one of these areas is weak.
This is particularly pertinent given the industry and regulatory concerns around greenwashing. Firms should develop a well-defined data validation and control process, with clear roles and responsibilities, when developing data in-house. Any data published to stakeholders needs to be consistent and transparent, with adequate record-keeping.
- Build IT competencies
Building an effective data management strategy requires more than just identifying metrics and choosing providers. It also requires the right technology. Technology stakeholders should be involved in developing the financial services ESG data management strategy from the beginning, ensuring that the reporting solution is always considered.
While there are many technologies being discussed and implemented by ESG vanguards, there are three that, in our experience, can enhance the data collection, aggregation and reporting processes: A scalable cloud infrastructure, multi-vendor connectivity and ESG-embedded internal ecosystems. By leveraging all three of these technologies, organizations can build the right foundation that is fit for purpose now and into the future.
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