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ESG Data: How Investment Firms Can Collect Client Sustainability Preferences

Sustainability related provisions under MiFID and IDD DAs came into force on 2 August 2022. This means that investment firms must, when providing financial advice, acquire sustainability preferences from clients as part of the suitability process.


What is ESG Data?


ESG data means Environmental, Social and Governance metrics. It measures a company’s impact on the environment, how it treats employees, suppliers and the community, and its corporate governance.


Our previous blog post explains ESMA’s requirements on clients’ sustainability preferences. Here we explore how investment firms can collect and assess ESG data for suitability and appropriateness.


Collecting ESG Data


1. From Clients:


Make ESG data collection part of the KYC process and obtain information regarding:


  • The client’s or potential client’s knowledge of ESG investing and experience in ESG investments – client’s level of education, profession or (if relevant) former profession.

  • How the 3 pillars - Environmental, Social and Governance - rank in importance with clients.

  • Whether clients consider it important to incorporate ESG in their portfolios.

  • The client’s financial situation and ability to bear losses – client’s source of funds and regular income, client’s assets, client’s regular financial commitments.

  • Client’s investment objectives, risk profile and risk tolerance.


2. Public Web Data:


  • News reports by reputable and established media outlets.

  • Posts shared on social media discerning positive or negative sentiment around ESG concerns.

  • Company reviews.

  • Satellite imagery to track deforestation as well as other environmental factors.


As it appears, however, there is a considerable gap in accessing ESG data online. ESG data available online today are diverse, so investment firms and businesses alike are incorporating the use of alternative ESG data collection methods as a means of evaluating ethical, environmental, and financial performance across all organisational structures.


Example: NGO reports or academic research about regional climate change or natural disasters statistics can help asset managers and companies alike to determine if it is wise to invest in construction within a particular region. It allows them to weigh the impending physical, indirect as well as policy risks that can be accompanied by extreme weather, such as damage to company assets, disruptions to the supply chain, or future caps on emissions.


3. Third Party Resources


Third-party data sources providing ESG data statistics that can be found by searching:


  • Reports by non-governmental organizations (NGO’s).

  • Government reports, websites and statistics.


Example: Monitoring rising sea levels or electrical grid failures could help asset managers peer into a future of impending capital spending. Additionally, data collected from government-provided automobile traffic emissions reports could help determine the demand at shopping malls, storefront parking lots, garages or other areas of commerce.


4. Internal Company Metrics


  • Company disclosures, annual reports and filings.

  • Information displayed on company websites surrounding ESG objectives and efforts.

  • Internal company metrics.


Example: Looking into employee statistics or internal company metrics could help uncover hidden or unconscious bias during the hiring process or within the workplace culture and identify areas to improve upon to promote workplace diversity.


 

FAI Comply can assist with the implementation of procedures to ensure your firm maintains regulatory compliance considering these new rules. Please contact us to discuss your requirements.