EU ESG Regulations: How Can Financial Institutions Overcome the Upcoming Challenges?

The EU’s ESG regulatory framework is the most extensive and detailed in the world and is expected to be the benchmark for sustainable finance legislation across jurisdictions.

With the demand for ESG investments growing at a rapid pace and the requirements of ESG regulations continuing to evolve, financial institutions face a number of challenges, especially with regard to the sourcing of high-quality ESG data to fulfill their disclosure obligations.

Overcoming these new challenges will bring more than compliance capabilities to financial institutions. Greater transparency into the ESG performance of companies will offer investors and asset owners huge opportunities in a market that is estimated to account for a third of all assets in the coming decade.

The most far-reaching of the new regulations are the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy, which oblige financial market participants to identify which of their investments and activities contribute to the EU’s targets and explain the impact they are having on the communities in which they operate and the world in general. They are also required to declare the risks that the transition to a net-zero future is likely to have on them and their investments.

Data plays an important role in the process of bringing about climate and social change – and in mitigating the activities that deepen those problems. Financial institutions will need new data sets, new insights, and new ways of gathering information to comply with the EU ESG regulations. These requirements will put enormous responsibilities on financial institutions. They will need to obtain and manage data they are unlikely to have readily on hand.

Gathering the data is one issue – managing and applying governance structures over it is another. ESG data is not like price and other reference data, for which most financial institutions have long-established data management processes. ESG data must first be standardized and structured so that it can be integrated with financial data, included in regular reports, and made ready for further processing by artificial intelligence and other sophisticated software.

Both the gathering and the management of data will put great operational and financial strain on a large majority of financial institutions. For that reason, a better route would be to engage a company with a tried and trusted record in the sourcing and management of regulatory datasets.

With more elements of the SFDR and EU Taxonomy coming into force at the start of next year, it is important for financial institutions to think now about how they want to position themselves for the future in terms of ESG data.

Download the full version of our special report to learn more about how to overcome the challenges of the EU ESG regulations and how SIX can help.