Firms must consider the validity of their sustainability-linked data – leveraging an external point of view can highlight risks and opportunities. Nikhil Asthana and Nicholas Larsen explore how ESG data assurance helped a UK financial services firm make a strategic decision and move closer to their goals.

As ESG regulations come into effect and stakeholders become more engaged, companies are increasingly looking to third parties to provide services with broader scope and more added value - extending beyond pure data acquisition.

The size, shape and cost of these services differ greatly depending on the high-level requirement, some examples include:

  • fund look-through, issuer-mapping and ESG data aggregation and mapping for regulatory, client and strategic reporting
  • ESG ratings and exclusions intelligence for private companies, non-listed assets and alternative investments
  • supply chain ESG optimisation, exclusions screening and greenhouse gas (GHG) emissions analysis
  • public records analysis of ESG positioning against targets and competition
  • ESG risk identification, modelling and tracking tools. 

A leading UK financial services firm, with a significant insurance and investment management business, engaged us to review and provide assurance on a significant service procurement. This decision involved choosing an ESG data platform, covering fund look-throughs, data aggregation, data mapping to frameworks and regulations, and providing ratings to non-public and alternative investments.

Identifying our client’s desired outcomes

Our client’s priority was to move most of the operational overhead and technical complexity required to conduct ESG data activities. The firm wanted to find a vendor to provide a single platform, which would consolidate the fund look-through data across listed, public and alternative investments, as well as combine it with ESG data from a selection of market data vendors, then present the resulting combined dataset in a web-based analytics platform.

The financial services company wanted the platform to provide a way to explore the ESG data market, map ESG metrics to specific regulations and standards/taxonomies and provide templates for fund-level ESG scoring. Crucially, our client intended to use this blended dataset as a key data feed in to its broader ESG reporting platform, with data normally being accessed via an application programming interface (API), rather than via a user-based application.

To meet the firm’s goals, we conducted a deep, systematic technical and business review of the requirements, the proposed solution and the contractual arrangement; with a goal of ensuring that it met the firm’s requirements and provided long-term value.

Key considerations and review items included:

  • reviewing the business requirement document and assessing the service offering against the core requirements set out in the business requirements
  • ensuring that the buyer’s internal technical and business processes and governance would provide the required inputs and controls for the proposed service
  • conducting a market-scanning exercise to evaluate the commercial and operational aspects of the proposed contract and assessing whether it's competitive compared to propositions from alternative vendors
  • reviewing expected asset coverage percentage target and assessing whether they met the minimum requirement set out by the client and the ESG regulations
  • identifying any gaps and advise on opportunities to extend coverage by adding data sources or providers
  • technical-testing of vendor-developed aggregations and calculations to confirm that the service is likely to deliver a reliable screening methodology, analytics, and reporting toolset
  • ensuring a robust methodology for uniquely identifying all assets, issuers and legal entities across the different asset classes and mapping these to the current ESG metrics
  • assessing the ability of the proposed service to integrate new ESG data sources and market data vendors as and when required without significant delay or investment on the buyer’s side
  • reviewing the available test cases, SLAs, and business acceptance criteria for suitability and operational effectiveness
  • ensuring any critical operational activities are clearly documented and fit for purpose. 

How we delivered targeted and valuable ESG assurance

As a first step, we mapped out the end-to-end service, including the key activities on our client’s side, to understand the key integration points and the expected service hand-off points between the vendor and the buyer. Target state service model for ESG

Using our team of ESG, data and financial services experts, we then proceeded to conduct our assessment leveraging our ESG data assurance methodology, breaking out the core components and mapping them to our ESG service procurement framework. This resulted in 10 key points to consider:ESG consideration points to consider

1 ESG data strategy
Clear and well-defined ESG data strategy in place with granular ESG data taxonomy. An end-to-end view of how data will be utilised to discharge reporting and board risk appetite or commitments.

2 Business requirements and use cases
Documented procedures detailing user functionality of the vendor ESG platform and data output matches business use cases.

3 Look-through coverage
Ability of vendor to identify rateable assets within the three different fund types.

4 ESG metrics trust
Confidence in the accuracy of the data provided, as well as the robustness of vendor's 'normalisation' and aggregations processes.

5 Materiality
The buyer's defined processes for identifying both financial and ESG issues that affect its own business operations and its clients.

6 Commercial value and contract break-clause
Evaluating whether vendors offering is in line with the buyer's requirements, competitive with current market offerings and pricing, including the effectiveness of the break-clause.

7 Estimations/gap closure process
The buyer's processes and automated provisioning systems for closing material data gaps that exist after processing by the vendors.

8 Data integration and reporting
The extracting of the data from vendors system and integrating into the buyer's internal ESG analytical solution run by their Singapore unit.

9 Overall process governance
The proposed end-to-end key operating procedures and quality monitoring for the overall process.

10 Service management
App SLA uptime, user training and support, as well as change management.

Addressing challenges and gaps 

Our final report to the client identified several areas of concern around this procurement, including:

  • the overall suitability of the specific solution, and a lack of clear return on investment (ROI) calculations, and a limited need from the buyer for some of the more sophisticated aspects of the vendor solution
  • unforeseen ESG technical and business reporting complexity, limiting the long-term value of the project
  • lack of evidence that the target coverage percentages were achievable, and reliance on a contract break clause to manage these targets
  • licensing costs that included a higher number of end-user licenses that was required
  • recharge of infrastructure costs which is not usual for a Software as a Service (SaaS) offering
  • lack of technical and business process specifications for integrating the vendor’s data output to the buyer’s internal data and reporting processes.

We also highlighted to our client several gaps, which we needed to close. We had to build a compelling and robust ESG data strategy, which articulated our client’s position within the organisation on how this data will be used to meet ESG and sustainability commitments.

We also had to consider how ESG-specific governance processes would be applied to the vendor’s offering. This is especially important for ESG use cases, due to the rapidly evolving regulatory and competitive landscape. As such, financial services firms must account for frequent changes to internal ESG standards and ESG regulations, and have a clear plan for how these changes will be accurately reflected across internal and external ESG reporting platforms.

What can you do to understand and strengthen your ESG data?

The first actions for firms will depend on where they are on their ESG data journey, but willingness to challenge and engage external viewpoints will help in strengthening and adding validity to their data.

Using our technology and platform frameworks, market insight, ecosystem partnerships and specialist ESG knowledge, we can support your ESG technology and data strategy. Whether it’s conducting a buy v build analysis, assurance over which data sources are required from market data providers, running a ESG procurement round or assuring an in-flight service integration.

Our team

Our team has the technical and business experience to help you make the right strategic decisions, and build robust ESG reporting platforms. Learn more about ESG data assurance or get in touch to discuss any of the topics raised.