Advancing the ESG data ecosystem:
From standards to decision-making

As climate-related risks and policy changes continue to impact companies and sectors around the world, investors’ already critical need for decision-useful ESG data is expected to grow.

Polling at the recent Bloomberg Sustainable Finance Forum in New York City revealed that "data coverage and quality issues with ESG reported data" are the biggest challenge audience members’ organizations are facing when it comes to managing ESG data, but standards designed to alleviate that challenge are emerging.

For example, in June 2023, the International Sustainability Standards Board (ISSB) introduced the IFRS Sustainability Disclosure Standards to enhance investor-company dialogue about climate-related reporting. However, debate around the standards continues.

“It’s incredibly important to be engaged in the global ISSB adoption and implementation conversation right now because we are

very much at an inflection point in the ecosystem where there are a lot of opportunities to achieve global coherence and there are also a lot of risks,” says Linda French, Global Head of Sustainability Policy and Regulation at JP Morgan. “A lot of issues are coming up as people are starting to think about implementation, and those need to be surfaced and be part of the conversation.”

Rising to shifting data demand

In Europe, where large companies are already required to report on their climate impact under the rules of the Corporate Sustainability Reporting Directive (CSRD), meeting reporting requirements tends to be another significant ESG data challenge for finance-industry stakeholders.

According to the European Commission, reported corporate sustainability information helps investors, among others, evaluate the sustainability performance of companies. But the frameworks companies are reporting on under the CSRD are not always the same frameworks investors have in mind when making decisions, according to Colleen Denzler, Chief Sustainability Officer at Loomis at Sayles & Company.

“When you think about what asset owners and companies operating in Europe are going to need to deliver [through corporate sustainability reporting], it’s really coming down to a framework of governance, a framework of risk, and I would even go so far as to say a framework of fear — fear around greenwashing, and fear around firms not meeting their net zero obligations,” says Denzler.

A lot of issues are coming up as people are starting to think about implementation, and those need to be surfaced and be part of the conversation.

Linda French, Global Head of Sustainability Policy and Regulation at JP Morgan

"When you think about what asset owners and companies operating in Europe are going to need to deliver [through corporate sustainability reporting], it’s really coming down to a framework of governance, a framework of risk, and I would even go so far as to say a framework of fear — fear around greenwashing, and fear around firms not meeting their net zero obligations," says Denzler.

Involving the auditor community

Materiality, on the other hand, is a more traditional framework for investors’ decision-making processes. Materiality has multiple meanings in the sustainability context, however (with “financial materiality” referring to matters that could affect profitability and “environmental and social materiality” referring to activities that generate negative environmental impacts that could affect wider stakeholders).

Giving investors the ability to assess and understand materiality considerations in the sustainability context starts with the efforts of the

auditors who assess the environmental-, social-, and governance-related risks companies ultimately disclose.

“The role of auditors is going to be incredibly important in how this develops — and I think that’s underappreciated — because this is not just about doing the disclosure, it’s about the process that you go through to get to that disclosure,” says French of sustainability reporting.

“There are a lot of novel questions around how you apply general reporting principles and financial materiality lens to information where it may be challenging to make a quantitative materiality assessment,” French adds.

We think that [the existing standards] can be useful as you make informed decisions about the allocation of capital.

Jean-Paul Servais, Chairman at the International Organization of Securities Commissions (IOSCO)

Refining standards to prioritize usefulness

Mindful of the importance of addressing the ESG data quality challenge through auditing, the International Organization of Securities Commissions (IOSCO) — a global membership organization focused on financial supervision — endorsed the ISSB standards only after engaging in a comprehensive review that involved challenging some of ISSB’s proposed standards.

According to Jean-Paul Servais, IOSCO chairman, the existing standards are a great starting point for further refinement.

“We think that [the existing standards] can be useful as you make informed decisions about the allocation of capital,” says Servais. “[But while] we are making progress, there is much more data to collect and capacity to build.”

Embracing a new phase

Driving up the meaningfulness and usefulness of ESG data from ISSB reporting and other measures will take time and collaboration. Having financial industry stakeholders involved in and contributing to the ESG data conversation will help the ecosystem advance.

“We are past the conceptual stage [of ESG], where a sustainability officer gets involved, and are moving into [a stage] of companies and governments talking about financial people and auditors getting involved,” says Denzler. “It’s a seismic shift.”

Quotes in this article are from the “Building a Comprehensive ESG Data Ecosystem: From Standards to Decision-Making” panel moderated by Cinzia Chirac, Head of ESG Regulatory Affairs at Bloomberg.

The panel was part of the Bloomberg Sustainable Finance Forum held in NYC in September 2024.