For regional banks and asset managers, the key challenges in the integration of environmental, social and governance data are the lack of comparable, quality and timely data and a limited understanding of how to draw out meaningful insights. Globally, this extends to the absence of a standardised ESG reporting methodology for collecting and analysing structured data.
Regional ESG disclosure frameworks in Asia Pacific are not as well-established as those in the European Union and the US. In addition, the number of global ESG standards, frameworks and initiatives causes confusion on which ESG data points are material and regionally relevant. However, Asia Pacific can benefit from evolving dynamics elsewhere and learn from issues relating to unverified ESG data.
Within the region there is disparity in data points collected across the different ESG factors. In Asia, governance datasets are perceived to be more established. Despite ESG data disclosure being largely voluntary, the number of disparate methods used by corporates is likely to reduce as understanding grows around data capture standards and frameworks are developed.
Within financial institutions, evolving market dynamics have identified a need for investment grade or validated and verified data, alongside the need for a global view of ESG metrics. This stems from the need to collect data to determine material ESG exposure and risk at loan/bond, sector and organisation level.
International investor demand has helped drive awareness and uptake of ESG disclosures in Asia Pacific, although large data gaps still exist. As the Asian market matures and regulatory pressure builds there will be an increasing need for ESG data standardisation, collection, verification and disclosure.
Technological innovation is advancing the availability and quality of ESG data in the region. Application programming interfaces, geospatial technology, artificial intelligence, machine learning and natural language processes are being used globally to collect and interpret data. Technology platforms can provide a range of functions for ESG reporting, including the ability to create an auditable record of scalable sustainable financing and responsible investments.
Data gaps were recently highlighted in the EU, given differing disclosure timeframes for the EU Taxonomy and Sustainable Finance Disclosure Regulation. Under this regulation, asset managers are required to disclose sustainability measures periodically from 1 January 2022, whereas under the non-financial reporting directive companies are only required to disclose alignment to the taxonomy in annual reports published in 2023. Market participants have had difficulty mapping assets to the taxonomy and there have been criticisms of leniency in some sectors and strictness in others.
In an interview in January, Chief Responsible Investment Officer at the United Nations-backed Principles for Responsible Investment Nathan Fabian stated, ‘The No. 1 challenge that investors report is that they are not sure if they are going to have sufficient data on their underlying holding’. CEO of Climate Bond Initiative Sean Kidney added that there is ‘a lot of extra data work to be done’ regarding the taxonomy.
Globally there is a lack of historical ESG data and wide variance in the level of coverage. Data coverage is improving in Asia Pacific but it will take a few years to develop the dataset required for quality ESG insights. Reporting guidance is needed as we see a shift from voluntary to mandatory disclosures to ensure the market digests quality data. The lack of transparent ESG data coverage is even more apparent in unlisted and alternatives given the nature of these asset classes.
Many financial institutions have difficulty understanding the data and have limited capacity to draw insights from it. There have been efforts to build both internal capabilities and market-wide infrastructure for standardised reporting. One of the key collection difficulties is the time it takes to upskill resources on operational risk across the numerous industries and regions. Financial institutions are also undertaking data usability and gap analysis to build more robust risk management.
ESG data disclosure is still largely seen as a box-ticking compliance exercise. However, we have seen an evolving trend in corporate culture towards more long-term views on sustainable business practices as studies show the positive correlation between financial return and sustainability. On the public side there is a build-up of data to support the shift, but this is a different story on the private equity side with limited disclosure on ESG metrics and impacts.
This dynamic will be fascinating to watch as the business community focuses on goals aligned to the UN sustainable development goals and the Paris agreement.
Dael Wilson is Business Development and Sales Executive at ESG Tech, a data exchange platform.