OpinionUpdates

ESG Data for a Green and Sustainable Future

The Future of Sustainable Data Alliance (FoSDA) was launched in January 2020. Spearheaded by Refinitiv and the World Economic Foundation, its partner network includes organisations such as IIF, GFMA, ASIFMA, Climate Bonds Initiative, FinTech4Good, Oxford University, the Spatial Finance Initiative, and Finance for Biodiversity, amongst others. FoSDA’s express aim is to “identify and accelerate the reliable, actionable ESG data and related technology that is needed for improved investor decision making on the global journey to sustainable development”.

We at Icebreaker One are proud to be a partner of FoSDA, and it’s a community whose goals are very closely aligned with our own. In this blog post, we’ll be looking at a few highlights from FoSDA’s initial recommendations to the financial community, addressed to both regulators and financial market participants. There are 3 primary themes: 1) Defining and creating a path to filling ESG data gaps and data holes, 2) mapping data to sustainability taxonomies and 3) the need for ESG data talent development globally. At Icebreaker One, our focus is on the data and data infrastructure requirements that will underpin the successful transition to green finance and a green economy, and so we will look at FoSDA’s recommendations through this lens.  

What are data holes and data gaps?

As an industry, we’re perhaps more familiar with the concept of data gaps – missing information related to a specific data point that has already been collected. An example might be data on greenhouse gas (GHG) emissions – it’s well-known and well-defined, there are plenty of standards out there, and the main challenge is that not enough firms are reporting it. Data holes, on the other hand, are potentially a much larger issue: entire datasets that are not collected at all, such as data on biodiversity risks.  FoSDA’s focus is on supporting regulators and the industry in identifying data holes and minimising data gaps, so that investors and regulators are able to have a better view of both specific climate risks as well as the overall systemic risks and challenges posed. 

Mapping and addressing data holes

The first step towards solving the problem of data holes is to identify where these holes exist. FoSDA has identified biodiversity data as a key initial area of focus, as nature-related and biodiversity issues are a new frontier in understanding climate and environmental risk. Regulators, data providers and investors should therefore come together and collaborate in determining the data sets that are needed to understand and address these risks. Where we collectively identify and map these holes, we then need to develop a plan of action to fill them. This can take the form of policy interventions – such as mandatory reporting requirements, or by interventions to open up public and private sector sources of such data – or through novel means of sourcing the data, such as geospatial data. 

Move away from binary reporting

By binary reporting, we mean reporting that requires a company to disclose whether or not it has certain policies in place. This is overly simplistic and does not provide any usable information on the robustness or actual implementation and outcomes of such policies. FoSDA therefore recommends a transition towards more standardised, metrics-based reporting. This could be implemented via the enhancement of existing reporting standards (such as the “Gang of Five”, comprising SASB, GRI, CDP, IIRC and CDSB), with financial institutions and data vendors, as consumers of this data, helping to determine the data points and level of granularity required.  

Increase focus on forward-looking data

It’s a well-known issue that ESG data – particularly environmental data – is near-useless if it is purely backwards-looking. That’s why we are huge supporters of the growing recognition of the role played by scenario analysis – a forward-looking tool for assessing climate impacts and risks – on the part of central banks, regulators and standards setters such as the Taskforce for Climate-Related Financial Disclosures (TCFD).  However, at Icebreaker One we also know that these types of forward-looking assessments also require common data inputs and base assumptions. Addressing this will also require multilateral cooperation and collaboration.

Standardise corporate ESG reporting

To be truly usable as means of internalising climate risk and ESG within the financial system, enabling the transition to a green and sustainable financial system and economy, we need ESG data standards and metrics that are internationally consistent, well-defined and produce meaningful, objectively comparable data outputs. 

As governments and regulators increasingly move towards mandating ESG disclosures and reporting, these will ultimately become costly but futile exercises for companies, unless they’re accompanied by clear standards. Existing standards setters will play a key role – but will require input from regulators and market participants globally as well.  

Sustainability taxonomies need to be mapped to underlying data

There are a number of initiatives across jurisdictions globally to develop taxonomies that define what is and is not “green”. These aim at helping financial institutions to better classify their products, investors to better understand the green credentials of their investments, and regulators to understand the relative exposures of the financial institutions that they oversee. In order to make the best use of taxonomy frameworks, they need to be mapped to the underlying data sets that enable taxonomy determinations to be made. Regulators therefore need to consider these data sets when developing their taxonomies.

Move away from singular dataset focus

Combining data sets from multiple sources, and starting to explore the potential for use of “alternative” data sources such as geospatial data, can provide powerful new mechanisms for understanding the exposures and risks of companies. There’s a need for governments, regulators and investors to all contribute towards understanding what these integrated data sets could look like and offer, and in creating the environments that will enable them. 

The need for ESG data talent development globally

As we’ve seen across these recommendations, we are going to need new skills and talent to drive ESG data forward and into the mainstream. Governments and regulators can play a role in helping to develop and nurture this talent, as well as in creating an environment conducive to innovation and testing of new ideas. 

Putting it all together

At Icebreaker One, our work with our insurance and financial partner network on initiatives such as SERI (the Standard for Environment Risk and Insurance) has highlighted many practical examples of the ways in which data gaps and holes are holding the industry back from developing the net-zero enabling financial products and services that are needed for the transition to a green economy. We’ve seen the consequences of these gaps in action, and their impacts. 

Even where data is available, it’s not always easy to find, or to access. We believe that the accessibility of data for decision-making is absolutely critical in the transition towards a green economy and a net-zero, sustainable future. Our vision is that a robust data infrastructure can address these challenges, and our goal is to work with our constellation of partners to develop this. 

Photo by USGS on Unsplash