PwC Luxembourg

Sustainable finance - Risk analysis and data

Benjamin Gauthier, Partner, PwC Luxembourg. (Photo: PwC Luxembourg)

Benjamin Gauthier, Partner, PwC Luxembourg. (Photo: PwC Luxembourg)

While the financial industry was used to coping with risk analysis and the related data management, the recent publication of the joint consultation paper on ESG disclosures (draft regulatory technical standards) seems to drive it to an unprecedented level of granularity.

At this stage, the information that financial market participants (i.e., alternative investment fund managers, investment firms providing portfolio management services, etc.) offering financial products (i.e., investment funds, insurance-based investment products, etc.) know is that ESG risk assessment will need to be performed. When it comes to the “what” should be done exactly and how, it is unfortunately less clear. However, the deadline to comply with these rules is swiftly approaching.

This raises questions around the practical implementation of non-financial data gathering in order to analyse the ESG risks of financial products. On the market, ESG data collection is relatively new. Hence, there is no standardised set of data elements that has been defined yet that can be easily accessed and used by asset managers. 

So far, several players have developed their own internal approaches and/or used external proprietary ESG ratings or scores. However the parameters, the calibration and the set of data used vary. What is more, some vendors do not provide the full transparency on the information gathered and the scoring method used.

In order to get prepared in that challenging context, leveraging on the parameters defined in the EU taxonomy as well as the specific thresholds of the sustainability-related disclosures in the financial services sector (SFDR) included in the draft for consultation of the respective Regulatory Technical Standards (RTS), financial market participants realise that the level of granularity that will need to be achieved is reaching unprecedented levels. 

At the same time, to proceed to the computation of the defined metrics as per the Joint ESA consultation on ESG disclosure – Annex 1, information will need to be collected from the companies that have been financed. However,  the Non-Financial Reporting Directive (NFRD) which will reinforce the ESG disclosure for companies will not be applicable before the deadline that must be met by the financial industry...

This raises the expectations and the difficulty of gathering the appropriate data and managing it. Financial market participants should not wait. Starting the discussions internally early enough on the definition of the processes that will be implemented, as well as involving the portfolio managers and deal teams (so that they include in their investment selection process a request for ESG data or, at least, an assessment of what could be provided) is crucial. 

The guidance from the regulator is clearly telling us that one rating/score from a single data provider will not be sufficient anymore. Instead we are moving to the use of multiple sources to reach a comprehensive set of non-financial indicators in order to comply with the new ESG regulation.

PwC has already worked in non-financial data collection & data management and their related challenges and we are happy to discuss this further. 

The author wishes to expressly thank Elena Ashley Emrick-Schmitz for her assistance with this article.