FactSet’s Vanessa Barnett, Global Head of Environmental, Social, and Governance (ESG), recently spoke with Compliance Solutions Strategies (CSS) to discuss the latest news on the European Union (EU) Sustainable Finance Disclosure Regulation (SFDR), the new details on the Regulatory Technical Standards (RTS) for Level 2 SFDR, and how financial firms can manage their ESG data for Level 1.
Q: What did you notice about the changes in the final version of the Level 2 RTS?
There has been major pushback on having to first of all source all of their ESG data, report on it at an aggregated level, and then track it over time.
Step one is that all of the timelines have been pushed back. Companies now need to be able to start tracking this data, at least not even reporting on it, from beginning of 2022. It’s really 2023 when the first actual reports have to come out and will look at impact at an aggregate level for the portfolio, continuing to track it over time, hopefully getting those adverse impacts ultimately down to 0. The primary pushback has been around getting access to data from their investee companies.
But first and foremost, there were 32 indicators, and now they’re down to 14. Technically it’s 18, but there are two additional if the fund is investing in Sovereign, and then two for Real Estate. But if it’s normal companies, it’s the 14, and really now focused most specifically on the environment, but a lot of the trickier environmental ones have been become optional, as well as a few on the social side that are focused especially on gender.
Q: Do you think that the European Supervisory Authorities (ESAs) have responded to the industry feedback by reducing the number of mandatory metrics? Is there still a significant degree of complexity involved in disclosing this data?
Absolutely. It’s going to be interesting to see how the non-financial disclosure directive is going to help with having companies’ incentive to make these disclosures. A fund can be invested in companies all over the world, so this is still going to be a major problem as many companies are not disclosing this data. Coming from a financial data provider, a lot of the emphasis is really on how to model some of this data in a way that is defensible, and how to find proxy data.
There’s still one indicator in particular, the share of non-renewable energy consumption and production, that is very tricky to get. Companies are not disclosing this data and I think we’re going to have a hard time even finding proxies for it. Until the non-financial reporting directive is a little bit more pinned down, prescriptive, and it’s adopted more globally, some of these numbers are just going to be hard to find.
Q: We seem to be at a point in the EU where a typical or conventional ESG rating is becoming much less significant. Is there a waning role for conventional credit-style ESG ratings?
From a benchmarking perspective, I don’t see them going away any time soon. That said, we are really hearing across the board that our clients want to get behind the rating and underlying data.
I see the future of ESG data falling into a few different categories. The biggest one will be what companies are saying about themselves. There’s always the prospect of greenwashing, but the more transparency that we have and the more light that’s being shined onto this data and the use of it will discourage people from misleading because ultimately there will be ramifications. But I do believe that you’re going to see more and more good quality disclosure from companies.
The other major pillar still will be what is being observed about these companies, and we’ll see more and more sophistication there. Right now, it’s looking at lots and lots of news and government reports. You’ll likely start to see more satellite- and science-led data that’s observing how companies are actually behaving and what stakeholders across the board are saying about these companies.
The third we see is physical asset data. That’s going to be particularly important as we really focus on climate-related value at risk (VaR) and understanding the dual materiality piece of it. This can be based on where a company is operating (e.g., what impacts are they having on the environment?) as well as the environment itself, climate change, and the climate regulation happening (e.g., are companies impacted by these things and what are the risks?).
Being able to do that modeling is really critical, but you need really all three of those datasets—especially around the geolocation of physical assets—to be able to match that up with various climate models and more traditional climate data.
Q: How is FactSet helping firms comply with the EU regulations, not just the SFDR, but also the taxonomy? What does the model look like?
We are a technology company first and foremost as well as a platform for the ingestion of many different content sets, so we’ve heard loud and clear about the SFDR from our clients. It’s absolutely the hottest topic and what everyone wants to understand, whether it’s learning more about the regulation itself, or how we can partner with our clients to help them comply.
It’s really about the data itself and the fact in addition to Truvalue Labs, we are open to other datasets, whether it’s proprietary datasets from our clients or other third-party ESG datasets that can help fill in gaps. While we aim to have a full solution ourselves in the coming years, it’s practical to expect that our clients will need to have content coming from a variety of sources and different niche providers, along with the piece we’re really bringing to the table, which is real-time monitoring, especially with the principal adverse indicators. They’re very prescriptive and there are specific data points as should be reported by companies. We know from a practical perspective that companies are only going to be reporting maybe on an annual basis, so this data is going to be fairly static and somewhat old. When looking at how we can help our clients be on top of emerging issues and understand where the true risks are, we believe that having a more real-time alerting system essentially will be key.
To hear the full conversation, listen to the CSS podcast.