An ESG data provider witch-hunt? Or just a lack of industry understanding?

Recent news suggests that investment firms have been ‘demonising’ ESG ratings providers, whilst we understand there may be concerns, we believe that a lack of understanding may be the root cause of this discomfort.

The claims made are that ESG ratings providers are providing incorrect information and offering patchy data. However, asset managers have called this out as undue “finger pointing” and suggest that the shortfall arises when fund managers oversimplify and neglect the breadth of information offered. Many ratings firms provide specific ratings for separate ESG points, while asset managers are opting to use general scores for ease, the Head of ESG Product Management at Six says.

As pressure applied by EU and UK regulators to report E, S, and G information builds, funds and ratings firms will need to collaborate effectively to meet imposed transparency requirements from the UK FCA’s SDR, EU SFDR, and new ESG ratings regulation on transparency and integrity voted by the European Council and European Parliament.

How is the industry currently positioned?

In a recent KPMG survey including 550 board members, there were key findings which highlight the requirement and drive from firms to gain better insight in this area. 

KPMG's 2024 ESG Organisation Survey spotlighted developments and issues with ESG data and reporting across asset managers globally. The industry has been suffering from challenges in this area including ESG data management and reporting capabilities and having efficient systems and processes to achieve this. Key findings within this research were:

• Insufficient Resources and Capabilities – 44% of firms state that insufficient resources or capacity to collaborate effectively is a key structural challenge when integrating sustainability strategies into broader business goals, with 83% stating they will moderately or significantly increase ESG integration into non-ESG roles.

• Drive for ESG investment internally – 90% of firms stated they will increase their ESG investment in the next 3 years, with 40% viewing ESG-specific software accounting as a top area for future investment.

• ESG Data Analytics – 47% of firms believe ESG data analytics and insights generation will be the most valuable ESG skills and capabilities in the coming years. Top measure to be ‘perceivably ahead of others in maintaining transparent sustainability reporting’ is Utilizing advanced data systems (59% undertaking this).

• Outdated ESG Data Management – 83% of firms believe they are moderately or significantly ahead of their industry peers (in terms of level of transparency of sustainability reporting), however, 47% of firms are using spreadsheets for ESG data management.

Furthermore, we are seeing greater initiatives from the financial regulators across Europe, specifically the UK FCA and EU supervisory authority ESMA. At Devlin Mambo, we are hearing these challenges and regulatory requirements across our clients and industry touchpoints. We are seeing uncertainty around SDR labelling and implementation timelines with the SDR labels coming into force from 31^st July 2024 while naming and marketing rules do not enter until 2^nd December 2024.

We have noticed that several fund managers across Europe are removing SFDR Article 9 funds from the market or demoting them to Article 8. The French regulator, the Autorité des marchés financiers (AMF), is further recommending a new SFDR framework to address clarity issues and a wider range for disclosures. The incorporation of TCFD by the ISSB into the IFRS S1 (sustainability-related disclosure standards) and IFRS S2 (climate-related disclosure standards) has required firms to remap, where necessary, to ensure alignment between the core disclosures of TCFD and IFRS S2. The exemption threshold for those captured by mandatory TCFD reporting currently sits at £5bn, however the FCA’s guidance suggests this could be lowered as early as July 2025. Those who wish to disclose against both SFDR and TCFD will have to be adaptable in their approach to calculation: SFDR uses quarterly snapshots, whereas the FCA requires TCFD reporting to use one annual calculation.

How can Devlin Mambo help?

We have thoroughly researched the ESG data market and we understand how difficult it can be to find ESG Data and Ratings providers the offer quality data and at a fair cost.

“Regulatory reporting is driving the need for more transparency and accountability over ESG information. To meet accelerated reporting timelines, the sustainability reporting process must become more controlled and efficient, which is difficult to accomplish in spreadsheets.” – KPMG

Our DM ESG Insights Platform tackles these challenges and redefines how investment managers search for ESG Data and Ratings providers. DM ESG Insights helps investment managers with:

• Short listing and selection

• ESG vendor due diligence and service benchmarking

• Demonstrating robust governance on oversight of ESG Data and Ratings providers

• Stay informed on key product changes in the ESG solutions markets

Our team has researched over 50 ESG data vendors and ESG financial technology solutions, and we have many vendors that actively participate on our platform. We are constantly growing the number of providers on our platform, and we have provided conduit support to HM Treasury and the Financial Conduct Authority.