ESG Disclosure — Impact Effects And The Role Of Data

More than words: ESG-reporting brings change for a better world. Or does it? And how does big data support this?

“Our house is on fire!” with these epic words Greta Thunberg alerted the public in 2019 at the World Economic Forum in Davos. Even though many things were set in motion since the Paris Agreement in 2015, only recently, do we see that ESG-reporting is becoming gradually mandatory with the introduction of several EU Sustainable Finance regulations including the Non-Financial Reporting Directive (NFRD) and Sustainable Finance Disclosure Regulation (SFDR), to meet the European Green Deal and to enable the EU´s transition towards a sustainable and low-carbon economy.
Read on to learn, what ESG can do and how technology can support it —and also check the recording of our safeFBDC Live event “The Value of ESG-Data for Sustainable Finance” here!

ESG-Reporting — The What

The acronym ESG stands for Environmental, Social and Governance. In an ESG-report, you can read about where a company stands in these fields. Let’s take a look at what is behind those big words.

> Environmental is probably easy to get — this is about what surrounds us and how we care about it — energy efficiency, climate change, carbon emissions, biodiversity, air and water quality, deforestation, and waste management.

> Social is not about Facebook and Twitter, but it refers to the way companies foster their people and culture and how that effects the broader community. Factors considered are inclusivity, gender and diversity, employee engagement, customer satisfaction, data protection, privacy, community relations, human rights, and labor standards.

> Governance considers a company’s internal system of controls, practices, and procedures, and how an organization stays ahead of possible violations. It ensures transparency and includes dialogues with regulators. Factors considered are the company’s leadership, board composition, executive compensation, audit committee structure, internal controls and shareholder rights, bribery and corruption, lobbying, political contributions, and whistleblower programs.

Transparent and comprehensive ESG disclosure activities of companies and institutions support financial sector participants, such as banks and asset managers, evaluate risks better, advise on investments and adjust credit conditions. The desired effect would be increased investment and support of as sustainable classified projects and companies, and at the same time should encourage others to improve on their ratings, not only by marketing greenwashing, but by actually changing the way they work. In the run to reach the Paris goals and to face urgent sustainability-related challenges, these changes should become effective as soon as possible.

ESG-Reporting — The How?

There are many factors that are relevant for a transparent and comprehensive ESG-report, but not all factors are easy to measure. So how can it be proven that a company is sustainable? And hence eligible for investments or credits?

Lara Hensel, Frankfurt School of Finance

Lara Hensel, Project Manager of our Sustainable Finance Use Case at Frankfurt School of Finance explains: “Investors and banks need reliable and wide data about the ESG performance of companies to take smart business decisions. However, the quality, reliability and scope of the reported data is often insufficient. What to do? Artificial intelligence-based methods, like Natural Language Processing, can support closing these gaps.”

ESG-Reporting — The Why?

Transparency beyond fiscal results for a sustainable future is not only used to create trust and to position companies from a marketing perspective, but also to help investors decide if a company is set-up for a future that holds unprecedented risks from natural phenomena and changes in the setup of our society. An ESG-report gives insights into companies and shows how well prepared they are for climate and society related challenges and related risks. Risks stemming from climate change can be of a physical nature, like being close to rivers that can be flooded. It also can be in the transition of business — like a cement factory, that produces really high amounts of greenhouse gases during its manufacturing and that might be replaced by another material. The rationale is that a non-transparent, incomplete ESG-report may lead to lesser investments, whereas a transparent and thorough ESG-report will bring more awareness and transparency and enable sustainable classified investments.

Lucie Haß, Helaba

Lucie Haß, Managing Director Helaba Digital and part of the safeFBDC working package on sustainable finance states: “Data is key to bring a solid and standardized basis into ESG-reporting and thus redirecting investment and financial flows into green and clean projects that help us reach the Paris Goal of substantially reducing global greenhouse gas emissions in this century to 2-degrees Celsius above preindustrial levels, while pursuing the means to limit the increase to 1.5-degrees.

Banks and asset managers want to make money and invest smartly. In the current situation, companies that are not fit for a sustainable and green future hold great risks and are thus not good for investments.

Let’s discuss!

To learn more about ESG Data and Reporting, rewatch our safeFBDC Live event “The value of data for ESG” on YouTube here to learn from industry experts and scientists how ESG can support a brighter future.

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