The Luxembourg-Sustainable Finance Initiative (LSFI) has identified challenges faced by financial professionals when it comes to ESG-related data and issued a set of recommendations, the not-for-profit association announced in a press release on 13 June 2024.

“When engaging with the financial industry, data consistently emerged as a top priority and challenge. However, the issue of data is very broad, and it is often unclear what the specific issues are. Identifying the root causes of these problems is the first step to addressing them,” LSFI CEO Nicoletta Centofanti said in the communiqué. “Additionally, financial institutions often rely on data providers, but due to the complexity of the topic and fast-changing regulatory requirements, they sometimes face difficulties in understanding their exact needs and tackling issues like data reliability.”

The ESG data working group at the LSFI found that certain challenges--reliability of data, absence of global standards, difficulties with comparison and consistency, lack of transprency, cost issues, complexity and rapid regulatory changes--were seen across all asset classes.

Recommendations

To tackle these challenges, the working group compiled a set of recommendations specific to each asset class: private, listed, debt and indirect.

Private: the LSFI’s working group recommended collaboration with portfolio companies, the creation of a transparent internal evaluation framework, continuous assessment to maintain consistency when calculating metrics and the integration of ESG reporting and data acquisition costs into fund expenses.

Listed: comprehensive due diligence on data providers should be performed and multiple data providers should be used for comparison, if feasible. Transparency on the state of data (whether it’s raw, how it has been aggregated or manipulated) is key, as well as reporting on key performance indicators. Data should also be centralised an audit trail should be clearly established.

Debt: it’s important to engage with companies to gather data. The LSFI working group also recommended assessing reporting frameworks and ESG data providers to ensure neutrality, trustworthiness and transparency, training staff, using public data sources to supplement ESG data and evaluating potential partnerships with fintechs, scientific experts or academics.

Indirect: the working group recommended aligning portfolio objectives with an established framework, tailoring ESG objectives, ensuring consistency in data and methodology and looking for synergies when acquiring data from aggregators while being careful not to encourage data monopolies.

“Financial institutions must implement data quality processes for the ESG data they use,” commented Nathalie Dogniez, chair of the LSFI ESG data working group and chair of Eurosif. “Since data quality and data sources vary, financial market participants must understand the data scope, acquisition processes and estimation methodologies underpinning the data they use. This is crucial for selecting data sources and data providers and maintaining data quality controls. That’s why, beyond analysing the current challenges and providing recommendations, we have also developed a questionnaire to help financial professionals improve ESG data reliability when acquiring data.”

This questionnaire is meant to help financial professionals assess the quality and scope of data, the sources and methodologies used, the data management and delivery structure and data interoperability.

The working group also suggested that policy-makers prioritise digital access to structured data, develop global reporting standards, align measurement methodologies, provide free resources and training and require transparency over ESG raw data.

Members of the ESG data working group included: Eleonora Maria Belenghi (Deloitte), Selim Boudhabhay (Principles for Responsible Investment), Nathalie Dogniez (independent director), Julien Froumouth (ABBL), Pascal Geiter (Allianz Capital Partners), Pierre-Mickael Géonet (UBS Group), Louis-Arnaud Iscla (freelance advisory), Béatrice Méthé (Primera Purpose advisor), Ala Presenti (Moniflo), Marie-Laurence Ribes (Banque Internationale à Luxembourg), Alexandros Severis (Intercontinental Exchange), Virginie Wauquiez (Carbon 4 Finance) and Ludwika Zacharz-Harazim (European Investment Fund).

Founded in 2020 by the finance and environment ministries, Luxembourg for Finance and the High Council for Sustainable Development, the LSFI aims to raise awareness and support the transition of the financial sector in Luxembourg towards sustainability.

Find the full report here.