ESG 3.0 and the advent of SaaS Solutions

The increasing sophistication and density of ESG standards and regulations means that companies, investors, and service providers are facing more challenges today when dealing with the pluralism of metrics and requirements. According to ESGBook, more than 1,250 separate pieces of ESG policy and regulation have been introduced between 2012 and 2023. However, partnerships between traditional data processing players and fintechs could well provide the answer to unlocking specialist solutions: this is what SIX calls “ESG 3.0”.

Sustainable Finance

Martina Macpherson is Head of ESG Product Strategy and Management at the Financial Information Business Unit of SIX. SIX is an infrastructure, services and solutions provider, which offers services relating to securities transactions and provides financial information and banking services. SIX also operates the infrastructure of the financial centres in Switzerland and Spain. Martina has over 20 years of experience in sustainable finance and is an award-winning ESG influencer, author and academic. She was named one of the “Top 50 Women in Finance” by the World Finance Forum in 2022. Martina will speak at the Sustainable Finance and Climate Risk Event in Amsterdam.

What specific challenges do smaller companies face when it comes to ESG data when compared with larger companies?

The initial demand for companies to provide reliable ESG reporting came from institutional investors. However, we now see a clear shift in terms of the disclosure of corporate ESG information towards the policy and regulatory side of the debate. Since 2017, in Europe, some 10,000 large, listed companies are subject to reporting in line with NFRD, which enabled a more harmonised picture than before. With CSRD coming into force in 2024, that pool of companies will be expanded to around 40,000.

Both on the normative and regulatory side there are a host of frameworks and definitions: be those the European Sustainability Reporting Standards defined by the EU Commission and the European Financial Reporting Advisory Group (EFRAG) or the parallel ambitions by the International Sustainability Standards Board (ISSB) or the Taskforce for Climate related Financial Disclosures (TCFD, now part of the ISSB) with regard to sustainability accounting disclosure standards. This framework complexity can be challenging for the data creators, aggregators, and consumers of ESG information.

How can companies with limited resources hope to make sense of all this?

It is an ever-persisting conundrum. We need to tackle the challenges across the reporting value chain. If we want to get clear, comparable, consistent information reported from corporations and their supply chains in line with the relevant regulatory frameworks, which is then interpreted by the ESG data and rating agencies and provided to investors, capital markets, banks, and lending institutions, then we need to start at source level, i.e. with the corporations. And that is a challenge if you look at the wider value and supply chain of the corporations which are mandated to report. Suppliers are not necessarily based in European or developed market jurisdictions. And that is why the SME challenge in particular as part of that conundrum is a long-term challenge for industry as a whole.

Do you see fintech as a means to navigate this confusing landscape?

I see fintech-enablement and Software-as-a-Service (SaaS) solutions as one way of tackling these multiple ESG data and workflow challenges. The complexity of today’s ESG data means that we need the right tools and means to automate that entire end-to-end data management process. Fintech players can certainly map and match the different ESG frameworks, depending on their normative and regulatory requirements and in line with investor clients’ specifications. They can also potentially outline inconsistencies, offer alternative reporting strategies, and provide information mapping to clients’ specifications in relation to the receiver of the data, be they companies, the wider vendor chain, or regulatory authorities.

Is there a specific advantage which fintechs have over the more traditional data and rating parties?

There is a lot to be said for relying on credible, trustworthy, proven infrastructure solutions and service providers in this field. However, when they partner with expertise in the fintech field, there is a flywheel effect. There has been a lot of M&A activity in the ESG ratings and data space, and now we see more activity in the ESG solutions space. Just to be clear, SIX is not a fintech provider: we are an infrastructure, services, and solutions provider. But with the right partners, it is possible to enable an end-to-end ESG data management workflow. That is the new journey which is fundamental to ESG 3.0.

So, the situation is in flux right now?

Yes, it is. We define ESG 1.0 as is the traditional world of ESG data supplying fundamental data, ratings, and index products. These were started 20+ years ago with the initial ESG data providers. Over the past five years, or perhaps even less, we have seen the arrival of what we characterise as ESG 2.0. This is a direct result of policy interventions in Europe and is primarily focused on Regulatory Risk and Policy Management. This puts regulation centre stage and while it started in Europe, we see more risk disclosure requirements from the US government and the Monetary Authority of Singapore in Southeast Asia, for example.

More regulatory requirements in turn drive the demand for “RegRisk” solutions. And directly as a result of this demand, we see ESG 3.0 evolving. We see this as the application of “RegTech” solutions and systems creating specialist solutions and high levels of product sophistication. Not only does ESG 3.0 specifically target clarity, comparability, and consistency of information in the ESG regulatory landscape, parties in this space also create systems which can be applied to end-to-end integrated workflows. This approach also answers increasingly to more sophisticated investor demand, as ESG factors become more widely adopted.

What specific developments have you seen in the ESG 3.0 space?

Firstly, it is growing fast! For example, many online and challenger banks are now diversifying their offerings towards ESG investments and are also tracking climate risk and other sustainability criteria. Other participants offer capital market and lending solutions that provide specific criteria and eligibility assessments in line with normative and regulatory frameworks for ESG disclosures and reporting on the one hand, and provide an assessment in line with second party opinions on the other. In addition, a number of market parties, traditionally offering risk management analytics and portfolio management analytics, are now extending their remit to include ESG, Climate Risk, Regulatory specific criteria, or impact assessments. Some are also applying climate science-based models.

These models can indicate climate VARs, implied temperature rise criteria of portfolios and so on. These increasingly specific pieces of information are then utilised for either portfolio management analyses, liability management analyses in the insurance space, and/or capital lending requirements and oversight in relation to banks’ lending portfolios and balance sheets.. Clients need more and more sophisticated and very specialist and specialized tools that can undertake these types of assessments. This is why ESG 3.0 — fintech enablement in the ESG space — is an absolute pre-requisite today. And that’s why, at SIX, we are developing a range of solutions for primary and secondary markets, in collaboration with key fintech partners.

Do you think these new data-sharing relationships can threaten established players?

I think it is important not to look at data in isolation from fintech enablement. That’s the key message. ESG 1.0 and 3.0 (with 2.0 in the middle) are elements of an interconnected workflow. In order to really manage the expectations from clients and all other stakeholders, the markets, regulators, and ultimately the source of information, we are all increasingly reliant on fintech solutions.

What do you hope to gain from the Sustainable Finance and Climate Risk Event yourself?

I would like to get up to speed on the latest developments on climate risk analysis and analytics. I’m curious to see where we are now from the perspective of a client’s journey, looking at assessing climate risk at scale, and through a science-specific lens. I am also curious to see where the European market is at the moment. What are clients looking for? This in turn will help us as we build and expand our own portfolio analytics tools.