With the increased importance of technological infrastructure and the influence of environmental, social, and governance (ESG) factors, it comes as no surprise that ESG data is becoming more integrated across entire organizations. Financial institutions are progressively adopting a systematic approach to embed ESG data into internal systems and processes, encompassing internal dashboards, transaction execution tools, portfolio management systems, supplier management, and client relationship management platforms. These consolidated ESG hubs use a "single source of truth" approach to data architecture and enable transparency and insights across various domains, including Counterparty Risk Management, Transactional Risk Management, Stewardship and Engagement, Asset Management, and Client Advisory and Reporting.
The following provides a high-level summary of the first considerations for enterprise ESG data management and shares practical insights from financial institutions' journeys towards integration of RepRisk ESG data across the entire organization. Key challenges and solutions for sourcing ESG data and integration of data are highlighted along with the cost savings and efficiency gains by taking a 360-degree ESG approach.
# I. What you need to know before you get started
Financial market players’ activities are shaped by the prominence of environmental, social, and governance (ESG) considerations, driven by investor strategies, regulatory obligations, and societal expectations. ESG considerations have multiple facets relating to the organisation’s own activities, as well as, more materially, its clients’ and investee companies’ activities and impacts. With data and analytics reshaping organizations in the last decades, it comes as no surprise that ESG data has become critical for financial institutions.
ESG data facilitates key areas such as:
- Enterprise risk management – ESG issues and incidents, like environmental failures or labor disputes, pose significant financial, reputational, and compliance risks to companies. They also have negative effects on the communities and environments in which these companies operate, and can materialize into financial losses and reputational damage. Integrating ESG data into risk management processes across the organization, especially among frontline staff within the Three Lines of Defence Model, can aid in identifying, monitoring, and mitigating potential risks. This approach also assists in balancing risk and reward within financial institutions' own operations, as well as when evaluating clients, transactions, suppliers, vendors, investments, insurance, and complementary services, ultimately enhancing operational resilience.
- Investment decision-making – ESG data provides investors insights into the sustainability practices of companies and alignment with their objectives and preferences. ESG strategies can be implemented across all asset classes to limit downside ESG risk, generate alpha via ESG signals, and create new financial products aligned with ESG goals. ESG data sources support stewardship and engagement activities, and allow for transparency on ESG risks and opportunities to clients through reporting.
- Regulatory compliance and reporting – in the past decade, market participants have experienced a sharp rise in national, regional, and global government and regulatory bodies standard setting initiatives designed to improve transparency and accountability, and to encourage companies to adopt more sustainable practices. This trend is expected to continue to further build on regulations, voluntary frameworks, and industry-specific practices.
- Stakeholder considerations – financial institutions position themselves as enablers of sustainable business solutions, innovations, and product developments. Expectations from various stakeholder groups such as civil society groups, employees, shareholders, and investors are increasingly high and commitments closely scrutinized. As such, ESG data integration and deployment into strategy and financial decisions can support improved stakeholder engagement and talent attraction.
