Environmental, social, and governance (ESG) issues are a growing concern for the financial services industry. The challenges that firms face in their ability to perform research, construct portfolios, issue green bonds, power actuarial workflows, and meet regulatory reporting requirements are compounded by one key issue: data. Whether they’re asset managers, insurance agencies, or banks, they are likely experiencing challenges around ESG data and reporting, including data accessibility, accuracy, and standardization.
In a recent Deloitte survey, more than half of senior executives (57% of survey respondents) indicated that data availability and data quality remain their greatest challenges with ESG data for disclosure. At the same time, senior executives are proactively taking action to ensure they are presenting reliable ESG data, with 89% noting a likelihood that their organization will enhance its ESG control environment.
Financial services firms hampered by legacy systems may be competitively disadvantaged versus peers with a modernized and holistic technology and data strategy that can pivot quickly.
Trends in the ESG agenda
Climate change, biodiversity, and business ethics are now important and established factors through which financial professionals and investors evaluate companies and assess risks. And as the mobilizers of global capital, the industry has the ability to not just influence corporations to meet their ESG targets, but also fund ESG-related initiatives. There is no clearer example than when 450 global financial services firms gathered at the COP26 Climate Summit pledged more than $130 trillion to sustainability goals, including keeping global warming to no higher than 1.5 degrees Celsius above 1990 levels.
But perhaps the best way to consider how transformative ESG issues have been in the financial services industry is to consider their impact on the broader financial ecosystem.
- To receive sustainability-linked loans, corporations are evaluating how ESG affects their business and altering their own value chains to meet ESG obligations.
- Asset managers are responding to investor demands: A recent PWC survey found that 79% of investors said ESG risks are an important factor in investment decision-making.
- For sell-side market participants, the financing of green assets is becoming increasingly commonplace. S&P Global estimates that global sustainable bond issuance will surpass $1.5 trillion this year.
- Banks are pivoting to meet client demands for ESG principles, making changes in research, data, and quant analysis, especially with a view to shore up their ESG credentials.
The integration of ESG data from buy-side to sell-side
Here are some of the key ESG use cases for business teams across three main industry subsectors: asset management, banking, and insurance.
- Institutional investors such as pension and sovereign wealth funds are investing in assets that meet a series of green criteria. They are also modifying reporting requirements for companies or funds that receive their investments to encourage ongoing support of sustainability policies. Individual investors are following suit.
- Portfolio managers are pivoting their corporate and investment strategies. Many new fund vehicles have opened globally to keep pace with surging demand. According to Morningstar, global sustainable assets reached nearly $4 trillion in the third quarter of last year, with more than 80% of those assets in Europe. Seven in 10 of the most popular funds for inflows in the United Kingdom that quarter were in funds that had a sustainable investing mandate.
- Regulatory reporting, governance, and risk managers are faced with ESG reporting obligations to meet key legislation and manage the evolving regulatory landscape. Regulatory reporting teams work to gather data and respond to ongoing requirements and recommendations laid out by regulatory and supervisory bodies at the local, regional, and international level.
- Commercial lenders are evaluating company information and performance, while creating new products that drive capital via sustainability-linked finance instruments towards corporations to help them transition their enterprises to lower carbon emissions and a more inclusive economy.
- Quant traders and quant research analysts are modeling and viewing trade risk differently in their search for alpha with stocks with green criteria characteristics.
- Debt capital market and fixed income leaders are increasingly focused on green issuance. Sustainable bonds, led by green bond issuance, have increased 20 times between 2015 and 2021. Last year saw $1 trillion in sustainable bonds issued for the first time, according to market data provider Refintiv.
- CXO, CMO, and sustainability leaders at retail banks are focused on driving positive customer experiences with climate-friendly products. Some banks are leading the charge with green mortgages that provide more favorable rates for energy-efficient homes. Others are re-evaluating customer experiences with paperless and enhanced digital offerings for card payments.
- Actuarial teams may shift to prioritize environmental implications during their assessment.These teams will need to incorporate external data sets and metrics to enrich their modeling of scenarios. In the US, the NAIC has developed an actuarial climate index to support insurers’ analyses of climate risk to businesses.
- Claims management leaders will review and assess claims payouts due to uncertainty in the insurance market. Once-in-a-century catastrophes are now happening with increasing frequency around the globe, placing pressure on insurers with claims that could exceed their ability to pay and striking at the core of the industry’s very business model.
- Underwriting specialists may see the consequences of climate change and the shift in product development as a result. There is unmet demand for new insurance products and coverage.
ESG is a data challenge
Despite the heightened focus on ESG in the financial services industry, many organizations face significant headwinds when they source, manage, apply, and distribute ESG data across different business lines—each with their own business needs and workflows. These include:
- Lack of standard metrics and definitions: With the plethora of ESG data providers and a lack of industry standardization or definition, many financial services organizations are forced to source ESG data from several different vendors in an attempt to compare and standardize. According to a recent EY survey, most financial services firms use between two and five different ESG providers, with some using up to 10 different third-party vendors. And as regulators are now increasing pressures to prevent greenwashing, developing a holistic and transparent approach to sourcing ESG data is more critical than ever.
- Data management challenges: Sourcing off-the-shelf ESG data sets, ingesting them, normalizing them, and linking them back to in-house company identifiers is time consuming and resource intensive —especially as different vendors have different data formats, models, and symbology, all creating data management issues.
- Data distribution challenges: Different teams across the organization need ESG data, creating data distribution challenges. For insurance providers, for example, asset managers, actuarials, underwriters, data scientists, and risk managers all consume ESG and climate data as part of their day-to-day.
ESG data objectives
Leading firms are marrying a unified data and technology strategy with a strengthened ESG capability that can integrate into existing business workflows. Beyond first-level data objectives, firms should ensure how ESG data objectives can achieve operability and scale to align with their corporate and investment strategies.
- Develop a single source of truth: Firms can avoid being locked into data silos from traditional data warehouses and data lakes, and gain the ability to scale multiple workloads across the business with a single copy of data.
- Increase data accessibility and collaboration: To enrich data sources from credible solution providers, market participants should consider how they can seamlessly access ESG data and data sets to power their portfolio construction, investment research, financial planning, and regulatory reporting workloads.
- Improve oversight and transparency: Firms can build out their ESG scores based on an aggregation of third-party ESG sources. With increasing transparency and disclosure requirements for investment firms, the calculation and reporting of ESG metrics against portfolio performance becomes vital.
- Integrate ESG workloads into workflow tools: To keep pace with stakeholder requirements, firms can choose to outsource their entire data pipeline and risk management tools to managed platforms.
To learn more, visit Incorporating ESG with Snowflake.