# How Distributed Ledger Technologies are transforming ESG reporting for Financial Intermediaries
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-03-25
Category: TECHNOLOGY
Category URL: https://financedigest.com/category/technology
Meta Title: Improving ESG Reporting with Blockchain Technology
Meta Description: Learn how organisations can streamline ESG reporting processes and improve data accuracy using DLT for better sustainability outcomes and stakeholder
URL: https://financedigest.com/how-distributed-ledger-technologies-are-transforming-esg-reporting-for-financial-intermediarieshtml

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_By_ **_Jorge Lesmes,_** _Head of Blockchain Banking at_ [_NTT DATA UK_](https://www.nttdata.com/global/en/)

Considering the fast-increasing demands and focus placed by businesses on environmental, social and governance (ESG) reporting, it remains a surprise that it comes in such haphazard and inconsistent shape. The standard and quality of ESG reports are mixed, with little uniformity in how different companies approach them. This results in a vast disparity in both how these reports are put together, and what the outputs of ESG reports actually are.

What is most surprising is that outside of what regulatory bodies request, there are real benefits to organisations in standardising their reporting. Yet because different companies approach it in different ways, it’s been borderline impossible to compare organisations side by side on ESG matters, [despite investors](https://www.financedigest.com/despite-the-headwinds-investors-have-important-reasons-to-be-cheerful.html "DESPITE THE HEADWINDS, INVESTORS HAVE IMPORTANT REASONS TO BE CHEERFUL") and financial intermediaries demanding the ability to do so.

However, things are changing.

**Drive**

The emphasis on better ESG reporting is being driven by two factors: organisations voluntarily looking to respond to what their stakeholders want and growing pressure from authorities and supervisors to do so. Given that such reporting offers a snapshot of an organisation’s sustainability progress, as well as a measure of its efficiency and performance, it is understandable that stakeholders are as much at [pressure point as the regulators](https://www.financedigest.com/analysis-u-s-regulators-could-be-pressured-by-slim-republican-house-control.html "Analysis-U.S. regulators could be pressured by slim Republican House control") are.

Yet the balance may yet shift from the former to the latter. It would be remiss not to acknowledge that a tighter legal requirement for [financial institutions](https://www.financedigest.com/the-future-of-financial-institutions-in-2023.html "The Future of Financial Institutions in 2023") to disclose ESG information is incoming: the voluntary aspect of the work is about to become much more formal as ESG reporting becomes mandatory for all private UK companies and limited liability partnerships with more than 500 employees and turnover greater than £500m, along with all publicly quoted UK companies this year.

As such, just how data is compiled and [reported is of growing](https://www.financedigest.com/bank-finance-for-cleaner-energy-grows-but-still-lags-fossil-fuels-report.html "Bank finance for cleaner energy grows, but still lags fossil fuels – report") concern, and more nimble solutions are being sought. Longer term, a more realistic, useful framework that consolidates the many approaches to ESG reporting will be vital.

In fairness to many organisations, part of the [problem has been that effective technology](https://www.financedigest.com/technology-preventing-minor-regulation-causing-major-problems-the-butterfly-effect.html "Technology Preventing Minor Regulation Causing Major Problems: The Butterfly effect") implementations were not sought fast enough. As a result, ESG reporting has primarily been [tackled manually by organisations](https://www.financedigest.com/tackling-the-complexity-of-data-within-financial-organisations.html "Tackling the complexity of data within financial organisations"), without the automated industry-standard tools to streamline the processes involved.

However, a tangible [solution looks set to transform](https://www.financedigest.com/exact-launches-practice-management-solution-to-help-transform-accountants-into-trusted-business-advisors.html "Exact launches Practice Management solution to help transform accountants into trusted business advisors") matters, one that deploys the flexibility and nimbleness of distributed ledger technology (DLT) to do so. It’s an important shift that will move away from traditional, scattered reporting models in ESG to an effective digital solution.

**Making things better**

DLTs sit at the heart of significant change and improvement. Facilitating a shared, robust digital document of record, DLTs have several core advantages, not least that they don’t have a central administrator in charge, and they allow for simultaneous, secure access and validation of entries.

In this context, the technology allows for a decentralised peer-to-peer transactional database, able to handle the complexity intrinsically demanded by the [financial sector](https://www.financedigest.com/tomorrows-world-how-cloud-computing-will-impact-the-financial-services-sector-in-2016.html "TOMORROW’S WORLD: HOW CLOUD COMPUTING WILL IMPACT THE FINANCIAL SERVICES SECTOR IN 2016").

Furthermore, the distributed nature of the ledger also makes it resistant to tampering. After all, DLTs allow the gathering of transaction data from numerous participants, resulting in a ledger that can be counted on, as no one person either controls it or stores it in its entirety.

Intersecting the power, flexibility and security of DLTs with ESG is a logical, and arguably overdue, step forward. What’s more, it builds on inroads already being made. After all, reports are already being written to state the case for DLTs and the [technology continues](https://www.financedigest.com/how-video-technology-continues-to-boom-in-the-education-sector.html "How video technology continues to boom in the education sector") to evolve. Why not harness it?

**When DLT meets ESG**

A 2017 survey from the World [Business Council for Sustainable Development](https://www.financedigest.com/reasons-to-hire-a-web-developer-for-your-business-website.html "Reasons to Hire a Web Developer for Your Business Website") highlighted the already-present appetite for adapting current ESG reports. It discovered that44% of member companies’ ESG [reports were already including online materials](https://www.financedigest.com/uks-morgan-advanced-materials-reports-cyber-security-incident-on-its-network.html "UK’s Morgan Advanced Materials reports cyber security incident on its network") beyond simply a PDF. That was a notable jump from previous surveys, and there were also signs that the reporting process itself was changing. 32% of reports were primarily in digital formats and the emphasis on downloadable elements was being reduced.

[Financial services have proven keen adopters of ESG](https://www.financedigest.com/how-green-are-your-investments-why-esg-data-integration-is-key-for-financial-services-firms.html "“How green are your investments?” – Why ESG data integration is key for financial services firms") initiatives, harnessing their efficiency, lower costs, and time optimisation, as well as integrating processes that reduce errors. Building on this adoption, DLT-based reporting will [lead to greater](https://www.financedigest.com/move-over-pcl-greater-londons-suburbs-take-the-lead-this-summer.html "Move over PCL, Greater London’s suburbs take the lead this summer") transparency, in line with regulatory requirements.

This latter point is key: every single record on a distributed ledger is available to securely access by those with permission. Many still lean towards paper-based systems, and yet here is a clear way forward. By centralising records on a distributed ledger too, it enables effective, [measurable collaboration](https://www.financedigest.com/national-cinemedia-releases-first-cinema-attention-measurement-study-conducted-by-lumen-in-collaboration-with-dentsu.html "National CineMedia releases first cinema attention measurement study, conducted by Lumen in collaboration with dentsu"). Stakeholders can streamline their own data reporting, as well as working to an established standard. Those aforementioned permissions can then be set as to who can access what parts of the ledger.

It’s also worth noting that there’s a finality to transactions that run through a DLT. That the record in the ledger is permanent, and in almost all circumstances can’t be reversed. This has a welcome [knock-on effect](https://www.financedigest.com/banking-turmoil-will-not-have-knock-on-effect-on-commodities-trafigura-cfo.html "Banking turmoil will not have knock-on effect on commodities -Trafigura CFO") when it comes to simplifying the auditing of an ESG report.

There’s an obvious way forward that’s emerged. By the establishing of a global, accepted framework for reporting, it can allow companies working in the same [industries to not only standardise their data](https://www.financedigest.com/theres-nothing-artificial-about-the-role-of-ai-and-data-in-the-finance-industry.html "There’s nothing artificial about the role of AI and data in the finance industry "), but also benchmark themselves more effectively.

**Collection and compilation**

Turning specifically to [asset management firms and investment](https://www.financedigest.com/french-watchdog-fines-h2o-asset-management-executives-over-tennor-investments.html "French watchdog fines H2O Asset Management, executives over Tennor investments") funds, ESG reporting already comes with mandatory regulations to adhere to. In this case, those [set down by the European Union’s Sustainable](https://www.financedigest.com/big-brands-set-to-miss-plastic-sustainability-targets.html "Big brands set to miss plastic sustainability targets") Finance Disclosure Regulation (SFDR), which aims to standardise sustainability disclosures for investment funds.

This works at two levels: product-level recording is self-explanatory, whilst entity-level reporting covers the sustainability considerations of the overall organisation itself. Within that, there are 18 – at the time of writing – mandatory universal indicators, and potential additional requirements on top of that. These are all necessary to prepare the required Principal Adverse Impact statement, which must consider the impact of [investment decisions on sustainability](https://www.financedigest.com/closing-the-sustainable-investment-gap.html "Closing the sustainable investment gap") factors.

On a product level meanwhile, pre-contractual disclosures for investment products are required, as well as statements for each [financial product offered by an organisation](https://www.financedigest.com/can-financial-services-organisations-harness-data-and-bi-to-catch-up-in-the-digitalisation-race.html "Can financial services organisations harness data and BI to catch up in the digitalisation race?  "). The complexity and quantity of such statements means they are not the kind of requirement that land on one person’s desk: they require the bringing together of data from a mix of sources. Often, a group is designated within an organisation to oversee internal factors such as data collection, before [information is shared](https://www.financedigest.com/privacy-vs-security-is-the-cybersecurity-information-sharing-act-beneficial.html "PRIVACY VS SECURITY: IS THE CYBERSECURITY INFORMATION SHARING ACT BENEFICIAL?") with external stakeholders. Understandably, some [outsource this work to external ESG specialist companies](https://www.financedigest.com/oxford-bus-company-outsources-for-the-first-time.html "Oxford Bus Company Outsources for the First Time"). In Europe in particular, the latter option has proven the most popular.

The multiple threads required by ESG and the evolving nature of it has led to some messy, inefficient systems over the past years. The lack of a tangible industry standard has proven a further obstacle. But there’s an opportunity here to solve more than one problem at once.

**Enter the ledger**

It’s clear that ESG reporting requires multiple stakeholders, some of whom will be external to an organisation. Even internally, the current world sees employees geographically broadly spread. A DLT thus offers a way forward in more than a single way.

Firstly, it standardises levels of reporting, and the methodology involved, across not just an organisation, but an industry. The data input capabilities afforded by a DLT open up effective, clearer daily portfolio analysis against benchmarks for instance. That, and better, more tuned data categorisation for product-related disclosures. Intelligence becomes more transparent.

On the receiving end of ESG reporting, a [shared front-end portal can standardise not only the manner in which data](https://www.financedigest.com/european-shares-edge-higher-on-healthcare-lift-weak-china-data-stokes-worries.html "European shares edge higher on healthcare lift, weak China data stokes worries") is collected, but also in how it is read. All via a tamper-proof system.

Tighter, more trustable [reporting has business](https://www.financedigest.com/how-increased-environmental-and-ethical-reporting-impact-businesses-and-their-cfos.html "How increased environmental and ethical reporting impact businesses and their CFO’s") knock-ons too of course. The cleaner, clearer and more standardised the data that makes up an ESG report, the more transparent and trustable an organisation becomes. This in [turn results in benefits outside of just compliance](https://www.financedigest.com/turning-big-data-compliance-into-a-competitive-advantage.html "TURNING ‘BIG DATA’ COMPLIANCE INTO A COMPETITIVE ADVANTAGE").

**Progress**

It matters not whether [financial institutions](https://www.financedigest.com/what-the-future-holds-for-financial-institutions-in-2023.html "What the Future Holds For Financial Institutions in 2023") are keen to move to digital solutions for ESG reporting, or whether they will be hesitant towards adoption: things are changing, and they are changing fast.

As [things stand](https://www.financedigest.com/why-banks-could-stand-to-learn-a-thing-or-two-about-financial-inclusion-from-fintechs.html "Why banks could stand to learn a thing or two about financial inclusion from fintechs"), whilst there is certainly interest from authorities, a mandatory streamlined system hasn’t been imposed on the sector. Instead, there is a welcome window for organisations to digitise and [streamline their processes](https://www.financedigest.com/emvco-streamlines-approval-process-for-mobile-payment-devices.html "EMVCo Streamlines Approval Process for Mobile Payment Devices"), and making them more transparent and trustable. To seize the initiative, before it’s seized for them.

These are not challenges unique to one company: they are being faced by industries as a whole, and in the case of the [financial sector](https://www.financedigest.com/how-can-the-financial-sector-safely-use-the-iot.html "How can the financial sector safely use the IoT?"), DLTs are providing an obvious solution.

It is only a matter of time before laws are changed to require the disclosure of ESG data. At the moment, there is a clear and present opportunity to get ahead of that the competition, and DLTs are the mechanism by which to do so.


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