# “How green are your investments?” – Why ESG data integration is key for financial services firms Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2022-03-15 Category: INVESTING Category URL: https://financedigest.com/category/investing Meta Title: ESG Data Management: Navigating Regulatory and Investor Meta Description: Discover how ESG investing is evolving from specialist firms to mainstream asset managers and the impact of key regulations like SFDR on data management. URL: https://financedigest.com/how-green-are-your-investments-why-esg-data-integration-is-key-for-financial-services-firmshtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/istock-13595841301-1736815962951-compressed.jpg) _By_ **_Martijn Groot,_** _VP Marketing and Strategy,_ [_Alveo_](http://www.alveotech.com/) Until recently, investing according to ESG criteria was the remit of specialist companies known as green or impact investors. These investors would have their own in-house data collection processes and their proprietary screening or selection criteria to assess potential investments. Although there were different reporting frameworks in place such as the PRI and GRI standards, the absence of standard data collection, integration and reporting solutions required them to create their own “ESG data hub” to provision their own analysts, front office and client reporting teams. As ESG [investing has become mainstream due to both a regulatory push as well as an investor](https://www.financedigest.com/why-are-investors-checking-out-of-uk-buy-to-let-and-checking-in-to-hotel-investment.html "WHY ARE INVESTORS CHECKING OUT OF UK BUY-TO-LET AND CHECKING IN TO HOTEL INVESTMENT?") pull, ESG information management is fast becoming mainstream for research, asset allocation, performance measurement, operations, client reporting and regulatory reporting. With the deadline for key ESG regulations like the Sustainable Finance Disclosure Regulation (SFDR) fast approaching, asset managers and asset owners must do more to anchor ESG data into their end to end workflow processes. Simply having a source of ESG [data to feed to the front office is not sufficient as businesses need this data from across the organisation](https://www.financedigest.com/auditing-in-cyber-how-organisations-can-keep-track-of-their-data.html "AUDITING IN CYBER: HOW ORGANISATIONS CAN KEEP TRACK OF THEIR DATA") to integrate into the whole investment management process – from research to client and regulatory reporting. **Using ESG data** Any firm that sells or distributes [investment products into the European Union will have to follow](https://www.financedigest.com/plastic-antibody-developer-strengthens-board-following-further-investment-from-mercia-fund-management.html "“Plastic antibody” developer strengthens board following further investment from Mercia Fund Management") the SFDR regulation. SFDR requires firms to [report on 18 mandatory Principal Adverse Impact](https://www.financedigest.com/uk-report-warns-of-impact-of-islamist-groups-in-prisons.html "UK report warns of impact of Islamist groups in prisons") (PAI) Indicators as well as some optional ones. Paradoxically, the reporting requirements for publicly listed [companies that asset managers invest](https://www.financedigest.com/anyone-can-write-assignment-need-people-able-apply-new-skills-workplace-says-top-investment-management-company.html "“Anyone can write an assignment, but we need people to be able to apply their new skills to the workplace,” says top investment management company") in lag behind the SFDR timetable. This causes an information gap and the need to supplement [corporate disclosures with third party ESG](https://www.financedigest.com/green-bonds-are-set-to-drive-corporate-esg-debt-out-of-slump-in-2023-barclays.html "Green bonds are set to drive corporate ESG debt out of slump in 2023 -Barclays") scores, expert opinion as well as internal models to come to an overall assessment of ESG criteria. There is also a need for ESG-data on the sell-side of [financial services](https://www.financedigest.com/how-crowdsourcing-can-help-drive-the-benefits-of-advanced-analytics-in-financial-services.html "HOW CROWDSOURCING CAN HELP DRIVE THE BENEFITS OF ADVANCED ANALYTICS IN FINANCIAL SERVICES"). For instance, in corporate banking ESG [data is increasingly crucial to support customer](https://www.financedigest.com/should-insurers-buy-data-direct-from-their-customers.html "Should insurers buy data direct from their customers?") onboarding and, in particular Know Your Client (KYC) processes. Banks will have to report their ‘green asset ratio’ – in essence the make-up of their [loan book in terms of business](https://www.financedigest.com/1-in-3-uk-businesses-looking-for-finance-are-finding-it-harder-to-get-a-loan.html "1 in 3 UK businesses looking for finance are finding it harder to get a loan") activities of the companies they lend to according to the EU Taxonomy. In the future, if a company [signs up to get a loan](https://www.financedigest.com/10-signs-of-loan-scams.html "10 Signs Of Loan Scams") from a bank as part of the screening criteria, it will be asked to disclose what kinds of business activities it is involved in and what kinds of sustainability benchmarks it has in place. Banks and other sell-side [financial services firms](https://www.financedigest.com/financial-firms-can-use-technology-combat-todays-cybercriminals.html "How financial firms can use technology to combat today’s cybercriminals") will also frequently screen their suppliers, as part of a process called Know Your Third Party (KY3P). They will want to know who they are doing business with, so they can then report this in their own Annual Report. [Banks will also want to climate stress test the products they hold](https://www.financedigest.com/what-does-2022-hold-for-open-banking-some-predictions-from-the-ecosystem.html "What does 2022 hold for open banking? Some predictions from the ecosystem") in their trading book for their own investment against certain climate scenarios. The ECB, MAS as well as the Bank of [England have all incorporated climate stress test scenarios in their overall stress testing](https://www.financedigest.com/what-to-make-of-the-headlines-brexit-and-bank-of-england-policy-eba-bank-stress-tests.html "What to make of the headlines? Brexit and Bank of England policy, EBA bank stress tests") programmes to gauge the solvency and resilience of banks. ESG data also has a role to play in the [way](https://www.financedigest.com/5-simple-ways-to-prevent-a-data-breach-from-putting-your-accountancy-practice-out-of-business.html "5 Simple ways to prevent a data breach from putting your accountancy practice out of business") banks manage their mortgage book as they are increasingly looking for geospatial data, for example to work out the flood risk of the properties they finance. Both sell-side and buy-side [financial services companies will also need to integrate ESG data](https://www.financedigest.com/data-centres-and-the-changing-financial-trading-landscape.html "Data centres and the changing financial trading landscape") with data from the more traditional pricing and reference providers to give a composite view, incorporating not just the prices of instruments and the terms and conditions but also the ESG characteristics. ESG data now needs to spread across the whole of the organisation, integrating with all the different data sets to provide a composite picture, becoming a key source of intelligence, not just for the front [office but also for multiple business](https://www.financedigest.com/tips-for-choosing-the-right-chief-finance-officer-for-your-business.html "Tips for Choosing the Right Chief Finance Officer for Your Business") functions. **ESG** [data challenges](https://www.financedigest.com/the-challenge-of-keeping-data-secure-why-in-house-security-isnt-enough.html "The challenge of keeping data secure: why in-house security isn’t enough") Common ESG data challenges [firms encounter as they develop their ESG capabilities](https://www.financedigest.com/sp-global-acquires-firm-to-bolster-capability-to-track-commodity-shipments.html "S&P Global acquires firm to bolster capability to track commodity shipments") include data availability, usability, comparability and workflow integration. Many corporates do not report the information [investment](https://www.financedigest.com/manchester-united-tanks-on-report-glazers-may-avoid-sale-with-new-investment.html "Manchester United tanks on report Glazers may avoid sale with new investment") managers require for their decision making or indeed their regulatory reporting. This leads to the [need to combine corporate disclosures](https://www.financedigest.com/what-banks-need-to-prepare-for-eba-pillar3-disclosure-of-esg-risks.html "What Banks Need to Prepare for EBA Pillar3 Disclosure of ESG Risks") with third-party estimates and scores, as well as internal assessments. _Usability_ issues include the disparity in methodologies third-party firms use to estimate or score firms on ESG criteria. [Rating firms](https://www.financedigest.com/dollar-firms-after-u-s-labor-data-suggests-more-rate-hikes.html "Dollar firms after U.S. labor data suggests more rate hikes") have their own input sets, models and weights. _Comparability_ issues in ESG are exacerbated by different standards, different reporting frequencies or calendars and also the lack of historical [data to track progress and benchmark performance](https://www.financedigest.com/big-data-lowers-insurance-premiums-and-optimises-business-performance.html "Big Data Lowers Insurance Premiums and Optimises Business Performance") over a longer time period. The biggest issue however is how to anchor the ESG data in a range of different [business processes to put users on a common footing – which requires the capability to quickly onboard users, reports and business applications onto a common set of quality-vetted ESG data](https://www.financedigest.com/finalised-pan-european-data-protection-laws-set-the-new-standard-for-a-privacy-friendly-business-environment.html "Finalised Pan-European data protection laws set the new standard for a ‘privacy-friendly’ business environment"). **Looking ahead** Accessing ESG [data and ensuring](https://www.financedigest.com/finance-firms-must-ensure-they-fix-data-fundamentals.html "Finance firms must ensure they fix data fundamentals") it is of good quality, comparable with other ESG data sets and well-integrated within existing workflows can be difficult. Organisations will need to cross-reference, match and combine the data, as well as assimilating it with traditional [data on companies and their financial](https://www.financedigest.com/the-financial-sector-must-act-to-tackle-internal-data-security.html "THE FINANCIAL SECTOR MUST ACT TO TACKLE INTERNAL DATA SECURITY") products. Traditional prices and security terms and conditions of [financial services](https://www.financedigest.com/financial-services-firms-turn-to-big-data-intelligence-to-fight-fraudulent-activity-according-to-xerox-study.html "FINANCIAL SERVICES FIRMS TURN TO BIG DATA INTELLIGENCE TO FIGHT FRAUDULENT ACTIVITY ACCORDING TO XEROX STUDY") providers will help build a composite picture from those different sources. However, data [management solutions and Data-as-a-Service offerings are now available to help firms](https://www.financedigest.com/exclusive-crypto-giant-binance-moved-400-million-from-u-s-partner-to-firm-managed-by-ceo-zhao.html "Exclusive-Crypto giant Binance moved 0 million from U.S. partner to firm managed by CEO Zhao") get the ESG information they need, the capabilities to quality-check, supplement and enrich it with their own proprietary data or methods and the integration functionality to put users and applications on a common footing. This will enable firms to have an ESG data foundation for their end-to-end investment management [processes on which they can build](https://www.financedigest.com/li-cycle-to-build-french-battery-processing-facility.html "Li-Cycle to build French battery processing facility") – for asset allocation, operations, client reporting and regulatory reporting alike. --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---