Navigating ESG’s complex regulatory landscape

Amid growing demand from socially conscious investors, asset managers have worked tirelessly over the past decade to create ESG investment vehicles. While the pandemic heightened mainstream interest in ESG, the trend is projected to continue its acceleration as it has become widely recognised as a key value driver. With these developments, regulators the world over have naturally taken notice, casting a critical eye to guard against potential “greenwashing” and to ensure funds are as sustainable as they say.

Europe is leading the charge in overseeing ESG products with its Undertakings for the Collective Investment in Transferable Securities (UCITS) regulations. Likewise, the EU’s Sustainable Finance Disclosure Regulation (SFDR), implemented in March 2021, is aimed at fostering greater transparency, requiring that all investment managers provide disclosures on their assessment and management of sustainability risks and adverse impacts.

While the US does not (yet) have formal reporting requirements, recent actions by the SEC suggest that it is only a matter of time. Tellingly, the US regulator formed a taskforce in March 2020 dedicated to developing initiatives to proactively identify ESG-related misconduct. And it’s not just governments that have become more active – the United Nations has also established its own set of standards via the UN Global Compact, demonstrating a global acknowledgement of the growing relevance of ESG.

Damian_HandzyThis increasing drive to protect investors from greenwashing has resulted in an incredibly complex reporting environment. The various standards that define ESG regulation today are not particularly well aligned, leaving firms without a clear roadmap to compliance. The granular nature of ESG data adds a significant administrative burden to integrate relevant factors into the investment process and to fulfil disclosure requirements.

With regulators, allocators and investors alike calling for greater clarity and efficiency, there is a clear need for a comprehensive ESG solution that enables firms to make sense of vast datasets while streamlining the overall compliance process. With the right tools, asset managers can navigate this rapidly shifting regulatory and business landscape with flexibility, precision and peace of mind.

A Systematic Approach
Amid the growing demand for ESG coupled with recently recognised financial vulnerabilities associated with firms with inadequate ESG practices, sustainability is now an integral pillar of the risk management process. That means ESG considerations can no longer be analysed in isolation from other factors. To provide asset managers with a transparent view of issuers’ ESG practices, reporting must be fully standardised and integrated into the wider process.

To meet this critical need, asset managers must have the ability to test various sustainable investment strategies and gauge the adherence of their portfolios to ESG standards across a wide range of analytics. Firms would do well to create their own unique ESG metrics, including rules-based weighting per pillar, dynamic rules-based exclusion lists and specific considerations based on individual clients, and integrate them into their wider portfolio analysis workflow.

This systematic approach integrates ESG data into the firm’s overall reporting and analytics, extending from allocation to risk measurement and from performance to stress-testing and liquidity profiling. End users should seek access to a diverse set of powerful reporting modules capable of generating insightful reports.

Optimizing Workflows and Data Streams
The sheer amount of granular data required by regulators adds a real challenge to the ESG reporting process, creating issues around both data acquisition and data storage. Regulators ask asset managers to account for many details, most of which can only be found within large, arcane datasets. This is a cumbersome and error-prone task made more difficult because these data points are often located in documents across a firm’s complex internal ecosystem. Once the appropriate data is acquired, firms must store it in a way that enables operations staff to combine datasets so that answers are accessible and easily distributed.

To alleviate these challenges, asset managers need systems built to reduce manual workflows and enable a robust data organisation without sacrificing efficiency or accuracy. These systems must be multi-source and vendor-agnostic, with a variety of datasets available out of the box. The ability to manage ESG data via a single point of access with a unified interface helps asset managers avoid a massive array of administrative, technological and data challenges, enabling them to standardise workflows and focus on their primary goal of generating alpha.

Designed to streamline the ESG data management and reporting process, Confluence’s ESG solution addresses both business and regulatory challenges, and offers a new way forward. Our end-to-end solution lets asset managers leverage a vast array of analytics, automating the monitoring and reporting across the main pillars underlying the sustainability of the investments. To make our solution truly multisource, we have partnered with some of the industry’s top data providers, bringing the best of the different sources available in the market all together in one place.

Once the data has been integrated, making sense of it becomes more intuitive than ever. With a singular view of the data, firms can track metrics in a systematic and coherent manner, eliminating the inconsistencies and pain points that have historically been inevitable when working with ESG. This provides maximum precision and control over regulatory disclosures, as well as any other necessary reports.

Armed with the systematic approach enabled by our comprehensive solution, firms can ensure they are fully prepared for a future in which sustainability, social justice and corporate governance play a more fundamental role in the investment process.

Automate the management and analysis of your ESG data, download the white paper here:

By Damian Handzy, Managing Director – performance, risk & analytics, Confluence.

DisclaimerThe information contained in this communication is for informational purposes only. Confluence is not providing, legal, financial, accounting, compliance or other similar services or advice through this communication. Recipients of this communication are responsible for understanding the regulatory and legal requirements applicable to their business.

©2022 funds europe



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