As countries enforce ESG Regulatory reporting, whether it be SFDR, ISSB related or any other of the myriads of taxonomies that are coming into force, firms will need to prepare ESG regulated returns information for their appropriate regulatory bodies.

Whilst firms generally want to be good corporate citizens, this level of complexity and uncertainty in regulatory regimes has led to some organisations moving away from declaring their investment products as sustainable.  This is, in part, due to the issue of measurement of ESG factors.   Most PDSs, if there is a sustainability component, is typically written as “thou shalt not invest in stocks in x” where “x” might be tobacco, alcohol, weapons, fossil fuels, human rights issues etc.   However, this can be challenging to determine where funds management is outsourced and once a ‘look through’ lens is applied.

In Australia, we have already seen ASIC launch a number of green washing related proceedings.  Firms have been lucky that the financial penalties have been relatively light thus far.  The breaches claimed by ASIC were an easy check of whether the firm ultimately held stocks of type x.  A simple Yes/No answer.  Well, relatively simple given screening checks type functionality has lived in front office systems for decades.

In conversations with various parties Curium Data Systems has observed that, in the main, there is a reluctance to invest too much time and money with ESG measurement until:

1. Regulations are finalised
2. Dates for compliance are finalised

And many firms are hoping that the problem will be resolved by consultants and/or custodians.

However, if you are an asset owner you are potentially missing an opportunity to gain competitive advantage by building your own ESG Analytics IP.  Regardless of the minutiae of the regulatory taxonomies that will need to be adopted for regulatory returns, we know most of the components that will need to be in good order to comply.  Broadly:

• Securities Matching and Mastering – always important
• Issuer Data and Hierarchies – the mastering of Issuer data has never been more important as ESG data is provided at the Issuer level, not at Security level.
• ESG Metrics – whether it be GHG, human rights, hazardous waste, etc.,
• Assets Owned via a ‘look through’ lens – and the deeper you go the better
• Adverse Indicators – these are calculated analytical measures that typically have Issuer metrics, ESG metrics and ownership values as elements of the calculation

Whether it be footprint, intensity or exposure-based calculations, many of the ones that are being adopted are derivations from Europe’s SFDR rules, which are probably the most mature.

There is more to it but once the above is mastered, quality checked and in good order it enables not only regulatory compliance but also PDS compliance by having a firm handle on your ESG exposures.  There is also the opportunity to have market leading ESG analytics capabilities.

Curium Data Systems has a growing number of clients who use CuriumEDM to manage their ESG data (as well as other investment data) and we have developed some fantastic capabilities to provide not only regulatory compliance, but also ESG Analytics.  If you are looking to build out your own ESG Analytics IP please contact us via the details provided on the Contact page of the website.