Sibos 2022: A problem defined is a problem solved – untangling ESG data

When it comes to ESG, taxonomies and the way in which ESG data is provided and accessed is becoming increasingly important as the world collectively tries to tackle a range of social and environmental ills.

Euroclear’s head of sustainable finance, Anthony Harper, spoke at Sibos 2022

But whether it is quantitative or qualitative data, and with a range of different taxonomies, sources and utilities, ESG data, despite its importance, is still some way from being standardised.

New regulations should make it easier for issuers to meet investors’ information needs, but how can the industry inch closer to a global baseline for ESG standards?

At Sibos 2022, for “The future of sustainable investment”, Anthony Harper, head of sustainable finance at Euroclear, speaks to some of the issues around leveraging ESG data and some of the potential solutions to making it more standardised.

Harper begins by outlining the two types of ESG data: originated and certified, or by proxy. “The challenge today is not everyone is reporting.” There is no global standard and “you pivot between people who are now beginning to comply with the various taxonomies and the data that’s already available”.

“On the investor side we see leading firms collect a lot of information, but that collection process is based on screen scraping or people reading documentation sustainability reports,” Harper says. In short, someone has to bring that together and create a common access point.

“We do see today, with the European single access point, a push towards looking at the information as a public good in a way that perhaps we differentiate ourselves by how we use it,” Harper says.

To comply with the European Union’s taxonomy there are 2,700 data points that need to come from the issuer to be captured and “make that information really usable for an investor”.

At Euroclear, “we’re consuming it regularly and extracting the information that we need to integrate it into our own reporting and communications”, Harper says.

Euroclear will also track the sustainable finance activities of a client, looking at their ESG performance, as well as understanding their ESG strategy targets and goals as well as how that’s being incorporated into KPIs used to measure performance and assess the interest rate or whatever the differential will be based on a penalty or a benefit.

“We’re also seeing ESG data really being integrated at the transaction level as well,” Harper says.

But much ESG data is summarised, which might not always be an accurate reflection of the whole picture. “The problem with a summarised ESG score is that it’s down to the summariser,” Harper says. A security may be badged as ESG, which may in turn affect the composition of your portfolio.

“That might mislead you because you’re looking at what somebody has summarised as an ESG leading security. Where we are seeing a shift is allowing people to assess impact and instead have a range of metrics,” Harper explains.

For example, “I have this basket of 100 securities, but on a relative basis, how can I increase my impact and the impact calculation is not one data point? You need the raw data, summarised up to metrics that you can get access to. So, our challenge at Euroclear is to figure out how do you operationalise that so we’re not actually taking ESG opinions.”

Harper says Euroclear is not going to be an ESG standard setter, “but we want to make sure inside our network, in the case of collateral, people have the right access. It’s about both the data and the interoperability.”

One of the challenges the industry faces is that there are 24 taxonomies in place measuring ESG data, and that number is “not going to go down, it’s going to go up, because that’s human nature”, Harper says. “We’re all going to look at things differently.”

If you take these taxonomies, “and you stack them next to each other, is there a 60% overlap, 70% overlap? You’re going to get a blend, but it will never really be 100%.”

“I think our challenge as processors, as asset servicers, as information deliverers,” Harper says, is who does the mapping of the data and how do you map one the 24 current taxonomies against each other.

Harper says real-time ESG data is also largely static, which could lead to bubbles if the information does not get updated and investors make investment decisions based on the data. “As an industry, how do we create APIs that allow firms to easily push out information that can then be captured?”

Harper says the firm is exploring that data element through its Impact Cubed venture, an ESG tech-enabled analytics and data science solution. “We see a lot of opportunity to take that know how, and then plug it into various use cases.”

Harper concludes: “How can we create building blocks that people use, whether it’s an asset servicer or an asset manager, so that we can scale sustainable finance?”