How to Overcome ESG Reporting Hurdles with Smarter Data Management

100 CDOs Share Their ESG Data Challenges

New laws for publicly traded and private financial services organizations to abide by environmental, social and governance (ESG) reporting mandates require a renewed focus on data. But many companies are grappling with data challenges that increase the cost and time needed to comply with these mandates. How can firms best overcome these hurdles and avoid hefty fines? Smarter data management holds the key.

Why? First, some background. ESG sustainability reporting is no longer a voluntary exercise for most countries. Here are just a few of the rules and regulations companies need to or will soon need to comply with:

• The Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy went live in March 2021 for the European Union, impacting 11,000 companies.¹
• The Securities and Exchange Commission proposed climate-related disclosures for investors in March 2022.²
• Shortly thereafter, on April 6, 2022, the Task Force on Climate Financial Disclosures (TCFD) went live in the UK, affecting more than 1,300 companies.³
• The industry is now expecting SFDR Level 2 to go live in January 2023,⁴  and the newly introduced Corporate Sustainability Reporting Directive (CSRD) is currently expected to go live in January 2024.⁵

100 CDOs Share Their ESG Data Challenges

In light of these developments, my colleague Peter Ku, VP and Chief Strategist for Financial Services, and I partnered with FIMA Europe⁶  to explore the ESG data challenges that companies in Europe and North America currently face. Our findings are featured in a new FIMA report, “Data dividends: Enhancing your information infrastructure.”

For the report, WBR Insights surveyed 100 chief data officers and similar titles in Q3 of 2022 from buy-side and sell-side firms across Europe and North America. The report highlights the data challenges these executives currently face, particularly around ESG sustainability reporting, and the innovative solutions that can address them.

Almost half of the respondents said that the data is embedded as part of the business fabric. But as seasoned data professionals will know, that data needs to be clean and trusted; in other words, “fit for business use.” In other findings:

• 47% of respondents spend from 25% to 50% of their time tackling challenges relating to siloed data environments.
• An additional 23% are spending up to 75% of their time locating the right data across multiple data sources.
• 45% of respondents stated that they already have a mature ESG data management and reporting process in place, but only 14% have a mature and automated process in place.

Looking at these numbers, it is self-evident that there is a huge responsibility to unify the data management by adopting AI-powered data governance and data integration to save time and resources.

Although investing in automation can help improve efficiency and accuracy, a large number of respondents have yet to do so. Given the regulatory nature of ESG sustainability reporting, having a manual process in place significantly increases the risk of human errors, which may lead to inaccurate reporting, which consequently may lead to regulatory fines.

How a Lack of Data Governance Controls Leads to ESG Reporting Lapses

We are already starting to see regulatory fines being imposed on companies. On May, 23, 2022, the U.S. Securities and Exchange Commission (SEC) fined BNY Mellon $1.5M for ESG misstatements.⁷  While some might say that $1.5M is a rounding error for some of these banks, it’s certainly a sign of things to come. Therefore, it is of utmost importance for companies to implement the appropriate data governance controls to ensure that their ESG reporting is accurate, auditable and verifiable.

CEOs of UK banks will know how unfortunate it can be to receive a “Dear CEO” letter from the UK regulator, requesting a section 166 skilled persons report,⁸  looking to deep dive into areas like governance controls and risk management, as well as data and IT infrastructure.

Most EU regulators have equivalent processes in place. There are many things that can trigger a section 166 skilled persons report, such as concerns identified following a supervisory visit; concerns triggered following a thematic review; or as a result of a development or incident at the firm. However, typically the biggest trigger is a lack of governance controls around regulatory reporting.

Interestingly, the FIMA survey revealed that 45% of CDOs are having to spend from one to 23 hours validating the lineage of data used, and 20% are spending up to five days doing so. Depending on the audience that is viewing these statistics, from a regulator’s perspective, this may suggest inadequate controls in areas like governance, controls and risk management, as well as data and IT Infrastructure.

Therefore, supporting the CEO, it’s also crucial for CFOs and CDOs to work together to ensure that they have a robust ESG data governance framework and ESG data integration across their business operating model, especially for ESG regulatory reporting.

Navigating the Upcoming Expansion of ESG Reporting Requirements

ESG reporting is a complex landscape. There are numerous global goals and principles, reporting frameworks, ESG ratings and indices and ESG regulations. International investors with global investment portfolios are increasingly calling for high quality, transparent, reliable and comparable reporting by companies on climate and other ESG matters.

It’s comforting to see that on November 3, 2021, the IFRS Foundation Trustees announced the creation of a new standard-setting board — the International Sustainability Standards Board (ISSB)⁹  — to help meet this demand. The intention is for the ISSB to deliver a comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities to help them make informed decisions.

On May 20, 2022, the G7 Finance Ministers and Central Bank Governors communicated their support and intention to adopt the global standard that will be set by the IFRS Foundation’s International Sustainability Standards Board (ISSB).¹⁰  This decision impacts over 70,000 companies that operate within the G7 countries, which will also be subject to ESG regulatory reporting.

With the exponential uplift in ESG regulatory reporting requirements and the need to have these numbers verified and audited, it is vital to have a robust ESG data governance framework in place.

Next Steps

Learn more about the data challenges facing CDOs and how Informatica can help companies overcome them. Check out the FIMA report, “Data dividends: Enhancing your information infrastructure.”

_{¹https://www.bloomberg.com/professional/blog/the-relationships-between-sfdr-nfrd-and-eu-taxonomy/
²https://www.sec.gov/news/press-release/2022-46
³https://www.unepfi.org/climate-change/tcfd/#
⁴https://ec.europa.eu/finance/docs/level-2-measures/C_2022_1931_1_EN_ACT_part1_v6%20(1).pdf
⁵https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en ⁶https://fimaeurope.wbresearch.com/
⁷https://www.sec.gov/news/press-release/2022-86
⁸https://www.fca.org.uk/about/how-we-regulate/supervision/skilled-persons-reviews
⁹https://www.ifrs.org/groups/international-sustainability-standards-board/
¹⁰https://www.ifrs.org/news-and-events/news/2022/05/issb-chair-emmanuel-faber-responds-to-g7-communique/}