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November 04, 2022

Here’s the missing piece of financial services ESG

To improve ESG disclosures and investment decisions, financial services firms need to develop an effective data management strategy with these four components.

It’s easy to find a financial services exec who believes environmental, social and governance (ESG) issues are crucial for their operations. It’s not so easy to find one who’s effectively mitigating financial services ESG-related threats.

A recent survey by global 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 most often missing from the picture is 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. Such a strategy should include four key components.

1.    Identify the right metrics

The first aspect of an effective ESG data management strategy is identifying a comprehensive set of ESG metrics. These should be relevant to the firm’s industry and account for three factors:

  • The business: For businesses, we encourage reporting on the core metrics recommended by the World Economic Forum (in collaboration with the four largest accounting firms: Deloitte, KPMG, PwC and EY.). When it’s not feasible to report on any given metric, sufficient explanation should be provided.

    For asset managers, we encourage the use of a variety of ESG metrics to meet the needs of a responsible investing business, whether to screen firms before making an investment decision or to calculate and report on ESG metrics for the portfolios they manage.

  • Stakeholders: Develop a two-way communication channel with a diverse group of stakeholders to inform your relevant metrics. Stakeholders should be able to comprehend and relate to the defined metrics to help them assess their respective ESG considerations.

  • Relevant reporting standards: 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. This, in turn, will influence their choice of metrics. 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.
2.    Select the right data provider(s)

With over 160 ESG data providers to choose from, and each often using their own unique methodology, the process of selecting providers may seem a daunting challenge. A study of six of the prominent ratings agencies found the correlation between their assessments to be relatively weak—from 38% to 71%.

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.

3.    Validate data quality and fix gaps

While the overall quantity of available ESG data is increasing, vast gaps in data coverage still exist, and overall quality is poor. Most providers fill these data gaps using their own estimation methods. Such methods vary drastically from one provider to another and are rarely disclosed, which makes them difficult to compare.

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.

4.    Build IT competencies

Data doesn’t live in isolation; it should be overlayed with a cohesive data management strategy to optimize data, streamline processes and generate meaningful insights. But 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 in particular that in our experience can enhance the data collection, aggregation and reporting processes:

  • A scalable cloud infrastructure
  • Multi-vendor connectivity
  • 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.

ESG in the UK and beyond

With the Financial Conduct Authority clearly focusing on ESG, and the UK Green Taxonomy a while off, we advise firms to address any issues in their ESG data management now to avoid future repercussions. It is becoming increasingly apparent that aggregation, dissemination and consumption of ESG data is key to achieving the vision set by pioneers in the ESG ecosystem, not just in the UK but across the globe.

This can only happen when the effort is underpinned by an effective financial services ESG data management strategy that operationalizes data from multiple sources, integrates it into business processes for better investment decisions, and addresses the rapidly growing regulatory environment through streamlined reporting.

To learn more, visit the Banking Technology Solutions section of our website or contact us.

This article was written by David Coolegem, Director, Consulting, Vivek Santosh, Senior Consultant and Sean O’Mahony, Business Analyst in Cognizant’s Banking and Financial Services practice.

Cognizant Insights Team

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