As mentioned, data is critically important in the ESG world, not just for reporting but also for due diligence, risk management and performance tracking and benchmarking. Data is also the area where asset managers highlighted that they face the biggest challenges, firstly with investment risk.
When asked if they have sufficient data to examine climate risk exposures across their funds (Q16), only a third (31%) have relevant data at a granular level across all of their funds. A similar number (32%), have sufficient information flow but only for climate-specific funds. The largest number though (37%) simply do not have sufficient information for all their funds.
This suggests a data availability problem. For example, when it comes to understanding how climate change risks impact funds and mandates (Q17), the same number (37%) do not have sufficient information.
However the reality is that there is an abundance of relevant data out there. There are challenges in the consistency of data – for example, different data providers have their own methodologies for reporting on climate risk. However, this should not be a barrier to making a start in collecting data – and the sooner the data is collected, the quicker asset managers can report on the direction of travel in their funds with respect to exposure to climate risks. Is it falling or rising? This type of transparency will be key for investors of all sizes and will be crucial to building trust.
And this data is needed at both portfolio level and a security level. For fund boards, this is critical, so they can properly assess a fund’s material weightings to climate risk.
The availability of data is also highlighted as the biggest barrier in building a climate reporting framework (Q18), as cited by 35% of respondents. The other most common barrier is data consistency (33%). Again, neither of these issues should be reasons for asset managers to delay their plans for developing a reporting framework. While there are challenges around consistency and standards, they are not significant enough to prevent action.
Fortunately, the market has sought to address the data consistency issue through a number of standards initiatives. In 2021, following the COP26 climate conference, the International Financial Reporting Standards (IFRS) Foundation introduced the International Sustainability Standards Board (ISSB) to meet the demand from investors for more transparent and comparable ESG reporting by companies.
“The intention is for the ISSB to deliver a comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities to help them make informed decisions,” stated the IFRS.
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2: Creating a climate risk framework
3: Importance of investment risk overlooked
4: Internal governance still developing
5: Education and skills are key
6: Data availability challenge misplaced
10: Recommendations and regulation
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