The EU Action Plan on Sustainable Finance poses a compliance challenge for many financial institutions. Companies should keep sight of the big picture and ask themselves how they can turn it into a strategic advantage.
“This is not just about complying, like a box ticking exercise. This can also be used to position a financial institution at the forefront of sustainable investing,” says Janine Hofer-Wittwer, Senior Product Manager, Financial Information at SIX.
“Financial institutions who take a proactive approach can build on the new regulations to create very interesting products and offerings for their clients.”
The drive for sustainability in terms of “ESG” – environmental, social and governance factors – is currently putting the whole financial world up for transformation. The EU Action Plan on Sustainable Finance comprises as many as 28 regulatory initiatives. Janine Hofer-Wittwer zooms in on two of the most important ones for the financial sector: the Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy.
“These regulations will have a huge impact on almost all financial market participants in Europe, and beyond. The big challenge is the time pressure, and the regulations are not finalized. There are new developments almost constantly … or at least that is what it feels like when you have to keep up with them.”
Public-interest companies with over 500 employees will need to follow the new taxonomy as they report under the Non-Financial Reporting Directive (NFRD). Furthermore, a wide range of financial service providers are affected by the regulations.
Another regulatory development, announced only in April 2021, is the proposed Corporate Sustainability Reporting Directive (CSRD). It is expected to replace today’s NFRD, and could then expand the number of targeted entities from currently 11,600 to approximately 49,000 and would increase the volume, quality and comparability of available ESG data from corporates.
Data is at the core
Financial information services are a central component of the solutions that financial institutions are implementing to comply with the new disclosure requirements.
“The data challenge is a big one. ESG data is not widely available at the moment and even when it is, it is often not comparable by the same standards. The EU regulations focus on the financial services sector – which in turn will require corporates to make more ESG disclosures. Even when more data becomes available eventually, someone will still need to source it, aggregate it and normalize it because it comes from many sources,” Janine Hofer-Wittwer explains.
It is inefficient for a bank or an asset manager to receive disparate data from multiple sources.
“So they go to a data provider like us, who has done that heavy lifting for them,” she says, also pointing out that the new data will fit smoothly into the financial information systems that clients are already using.
Janine Hofer-Wittwer has a risk management background from her previous roles at banks including UBS and Bank of America Merrill Lynch. At SIX, she was responsible for risk management products and offerings, and since early 2019 her focus has been on ESG Data.
“I kind of pushed to be the person who can help move this forward in our product portfolio,” she says, half joking.
“I had a feeling it would add even more to the sense of purpose in my work, and I must say it has.”
The number of sustainable funds in the SIX database is now growing steadily.
“This is mainly driven by new issuance in Europe, and we can read on a regular basis how these funds are attracting new capital. In parallel, we see the growth in the issuances of green and social bonds,” says Janine Hofer-Wittwer.
Click here to learn more about the ESG Regulatory Data from SIX.