ESG Viewpoint:
ICE

# RepRisk interviews Becky Palmer, Director of Sustainable Finance at ICE

# March 2023

Becky Palmer: I’m a senior member of the ICE Sustainable Finance Team, which offers a range of cross asset sustainable finance data and tools. We provide a comprehensive view of ESG issues across the market to help clients uncover opportunities, manage risk, and provide transparency to their clients and regulators. My main focus is regulations which are emerging in the EU and UK, and how they interoperate (or not!) with requirements in other regions. I’ve been working with RepRisk on our SFDR PAI solution since its inception and feel confident we have a service that can help clients meet their reporting obligations.

The PAI Indicators are a set of metrics defined in the SFDR, which larger financial market participants must use to measure their adverse impacts on sustainability matters through their investments. However, the PAI Indicators have been woven into other aspects of the regulation, forming the means by which issuers of funds subject to Article 8 or Article 9¹ describe how they have considered principal adverse impacts, ensuring these are embedded into their investment decision making. With this information becoming a key component of the investment process, there’s a clear need for robust quality data to support the requirement.

To ensure quality in our SFDR ESG data, our research process is subject to quality controls. These include an open and transparent challenge process for issuers and clients to submit inquiries for continuous validation of the data.

Our dataset includes over 550 company-reported data points from publicly-available sources and reports, and combines this with RepRisk’s outside-in ESG risk data to provide clients a comprehensive SFDR solution.

BP: Several of the PAIs are reliant on company disclosures (such as energy and water consumption, recycling, and emissions information), but others focus on how a company could cause or is causing harm. We supplement company-reported data with ESG risk data from RepRisk. The ESG risk data from RepRisk is obtained from media and other public sources and stakeholders, excluding company self-disclosures, and provides the outside-in viewpoint needed to identify blind spots where a company may have an adverse impact on sustainability factors. This combination of inside-out company data and outside-in RepRisk ESG risk data has allowed us to provide PAIs across the broad swath of mandatory and optional environmental and social PAIs (41 corporate PAIs in total).

BP: Larger financial market participants use the ICE SFDR solution for their investee companies (with a small number of instrument types falling out of scope) on a quarterly basis in order to calculate PAIs across their entire portfolios and to include in their PAI statements. A broader set of asset managers who issue Article 8 or 9 funds use this dataset as part of their investment processes and to produce customer-facing product documentation for the pre-contractual investment stage, as well as annual reports. The data can be used to explain the decision-making process and to demonstrate a fund’s sustainability credentials. Some clients also use these data points as selection criteria, effectively as a screen within that process.

BP: The main stumbling blocks we see are issues with data availability, gaps in reporting, and problems matching data in large portfolios. We see companies reporting in different formats, which can make it challenging to easily draw comparisons between data points and highlights the importance of data consistency and standardization. For companies that have gaps in their reporting, we’ve developed an inference model to produce estimated data that can be included in reports to increase coverage.

We also see clients trying to source the right ESG data for products in their portfolios, which is less challenging for listed equities, but becomes more difficult for fixed income securities where the issuer may be a subsidiary within a larger organisation and not doing sustainability reporting. Our solution helps clients by linking our extensive securities database of over 1.2 million corporate fixed income securities and their issuers to our corporate hierarchy information, making it possible to identify the parent company that has an ESG profile based on disclosures. That mapping applies not just to the SFDR data but also to our ESG company data and the RepRisk ESG risk data.

BP: Practitioners new to SFDR need to start by considering the objective of their fund in order to identify the relevant data. In addition to the mandatory PAIs, a number of additional PAIs from the optional group must be selected for consideration in the investment process: at least one environmental and one social indicator.

It’s important to select additional PAIs that align with the theme or objective of the fund, for example, selecting water usage and recycling if the product is focused on the protection of marine resources. This selection should also be informed by the availability of data for the portfolio, as there is very little data reported for some of the PAIs and estimates are only meaningful for certain data points.

A goal of policymakers is to eliminate greenwashing in sustainable investing, and they have set a precedent by imposing sanctions on those deemed to have intentionally misled investors and consumers. It’s therefore important that practitioners have confidence in the inputs and data used in their investment methodology and that they consider how to mitigate sustainability risks. In light of this, asset managers should consider PAIs that can help identify companies whose activities could expose investors to those ESG risks.  

BP: The corporate disclosure sustainability frameworks, which are being finalised at the moment (the European Financial Reporting Advisory Group’s European Sustainability Reporting Standards and the International Sustainability Standards Board frameworks), will be fundamental in supporting incoming regulations. As I described, one of the biggest challenges we are hearing about from clients is the lack of relevant, reliable data. The data problem can be addressed by establishing clear standards and definitions for company disclosures. Once we have that foundation in place, investors will be able to compare apples to apples and make precise investment decisions about where and how they allocate money in alignment with their sustainability goals and the transition to a net-zero economy.

BP: Regulation in this space continues to develop and we don’t foresee that changing in the near term. We are adding data around the EU Green Taxonomy to our content set, which is required for SFDR reporting. In addition, we recently launched a solution for TCFD reporting, which is the bedrock of many of the climate related requirements coming from the EU, UK, US, and other jurisdictions. I expect we will be busy helping clients with many of the other developing regulatory requirements in the years to come.

---