ESG Data Risks Pose Compliance Challenges for Asset Managers, AFM Study Finds

In a world where sustainability is no longer just a buzzword, asset managers find themselves facing complex, often thorny challenges around environmental, social, and governance (ESG) data. The Dutch Authority for the Financial Markets (AFM) recently put this into focus with an in-depth study, pulling back the curtain on the hurdles asset managers face in risk management and compliance tied to ESG.

The study, which examined ESG data practices across various asset managers, emphasized a pressing need: for ESG data to be truly effective, it must be both reliable and independent. According to the AFM, without this foundation, asset managers can’t adequately integrate sustainability risks into their core operations and investment strategies.

“Ensuring the reliability and independence of ESG data is an important precondition for managing and integrating sustainability risks in business operations and investment policies,” the AFM stated, driving home the importance of robust data practices.

Why does this matter now? With the regulatory landscape quickly shifting, asset managers are increasingly being called to weave sustainability into their decision-making and risk management practices. The AFM, as part of its supervisory role, holds firms accountable to these evolving standards, making the call for strong ESG data frameworks more relevant than ever.

Insights from the AFM’s ESG Data Study include:

• Varied Governance Approaches: The study revealed a spectrum of ESG data governance strategies among asset managers. Some firms have meticulously formalized their roles and responsibilities, while others embed ESG data risks within broader risk management systems.
• Heavy Dependence on Third-Party Providers: Third-party providers are often the go-to for ESG data needs. However, this reliance raises flags about transparency, comparability, and whether the data is as accurate and complete as firms assume.
• Defining Data Risks Clearly: Having a clear, standardized definition of data risks helps asset managers zero in on challenges, setting the groundwork for effective risk management.
• Quality Control in Action: Asset managers are finding a balance between proactive and reactive measures to ensure data quality, from maintaining feedback loops with providers to carrying out spontaneous quality checks.

Despite these strides, AFM’s study also highlighted ongoing struggles. Data methodologies remain opaque, reporting formats lack consistency, and it’s often tricky to trace data back to the right issuers, all of which can hinder compliance and contribute to gaps in data quality.

“These observations can further support asset managers in establishing robust ESG data risk management frameworks,” the AFM noted, hinting at the practical impact of its findings for the industry.

As regulations evolve, asset managers will need to refine their ESG data frameworks to fulfill compliance obligations and provide investors with trustworthy, sustainable investment insights. With the AFM’s findings as a guide, firms can start building a stronger foundation to navigate these challenges—ensuring the integrity of their ESG data and reinforcing their commitment to sustainable, responsible investing.

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