For a rapidly growing number of investors and institutions, environmental, social, and governance (ESG) factors are becoming an increasingly important part of every strategy. Historically, the challenge of ESG data has been a lack of standardization in the types of data collected and the ways in which these data sets are exchanged among financial organizations.
The new European ESG Template (EET) represents a major step forward for standardization of ESG data exchange among market participants in the European Economic Area (EEA). The EET is an official data exchange template that provides the full data set required to explain any fund’s ESG characteristics.
The EET was developed by Financial Data Exchange Templates (FinDatEx), a European standardization body, and representatives of the European financial industry to support the Regulatory Technical Standards (RTS) for the Sustainable Finance Disclosure Regulation (SFDR), which goes into effect on January 1, 2023. The SFDR RTS establishes guidelines for presenting data related to sustainability and related impacts, among other ESG factors.
In other words, the EET will make it easier for banks, funds, insurers, and others to comply with SFDR RTS as well as the other similar regulations, including the Markets in Financial Instruments Directive (MiFID) and the Insurance Distribution Direction (IDD) regulations, both of which went into affect in August of 2022. Both of these regulations relate to investor sustainability preferences, or how they want capital invested with respect to ESG issues.
All of these regulations are aimed at ensuring investors can make environmentally friendly choices, making it easier for asset managers and investors to aligned on ESG factors, and prevent greenwashing that obscures the reality of ESG metrics. While the EET is not a form of mandatory reporting, financial organizations can use it to ensure compliant exchange of ESG data instead of creating data exchange methods independently.
Specifically, the EET includes all ESG-related metrics that can be reported and exchanged, such as greenhouse gas emissions, fossil fuel usage, non-renewable energy use, and hazardous waste output as well as social and employee issues, such as the gender pay gap. It offers a holistic solution for organizing and exchanging vast amounts of ESG data.
For example, the EET contains information regarding Principal Adverse Impact indicators (PAI), one of the most challenging parts of the SFDR. PAI indicators are mandatory metrics intended to show how investments pose risks related to ESG matters, whether greenhouse gas emissions, carbon footprint, human rights issues, and even corruption and bribery. PAI rules require financial institutions to collect ESG data and disclose sustainability risks, and the EET gives funds a way to do this consistently and compliantly.
Indus Valley Partners is closely following the development of the EET and is already helping asset managers integrate the EET in anticipation of the SFDR deadline. We recommend asset managers familiarize themselves with the EET as soon as possible because this deadline is right around the corner. IVP can also help streamline the process with the IVP Regulatory Reporting solution.
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