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Innovation Vs. Standardization: Striking the Right Balance in ESG Regulation

Last month, the European Supervisory Authorities (ESAs) launched a consultation around the technical requirements for Environmental Social and Governance (ESG) disclosures. The consultation will help inform Regulatory Technical Standards for the EU’s Sustainable Finance Disclosure Regulation, which aims to bring greater transparency to the area of ESG investing.

However, as analysts are making clear, the regulation will present a significant challenge to buy-side firms given the complexity of associated data management tasks. The main hurdle facing asset managers and investment companies is the lack of standardization around how ratings agencies and corporates report on ESG factors. Given that firms source data from multiple providers and alternative datasets and often add their own in-house data and ratings, presenting a large volume of data in a consistent and meaningful ESG disclosure is no small task.

Andrew Barnett, Head of Product RIMES, gives his thoughts: “the sourcing, cross-referencing and data engineering that will be required under the proposed approach is complex and time consuming, particularly when it’s not your core business activity. But this is not an insurmountable challenge: data specialists like RIMES can partner with buy-side firms to take care of the data management tasks, so they can focus on their investments & distribution value proposition.

“What’s more of a worry is the potential impact on innovation of any regulation that’s too prescriptive. The ESG market is young and evolving, and there is a lot of innovation happening out there around different ratings and disclosure methodologies. If buy-side firms and their end customers are to benefit from this experimentation and innovation then regulators must give ESG companies the required time and space. Let’s not forget that it took a long time indeed for credit ratings agencies to be broadly understood and comparable.

“For me, the key now is to focus on transparency and education as the market evolves. The worst-case scenario is that we accidentally regulate the benefits out of a more environmentally responsible approach to investing.”

Contact us for more information on RIMES’ ESG data services.

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