The next ESG reporting challenge

In this latest ESG Quick Takes podcast episode, ESG Book’s Isabel Verkes speaks to Tata Consultancy Service’s Navin Rauniar about how multi-sector and emerging market companies approach ESG differently. How can sustainability data be more standardized? What are the limits to that standardization – given the different business environments across the globe? Nav shares his observations, including those based on his work leading sustainability within TCS and the Tata Group.

Surprise Package

On 13 June 2023, the European Commission unveiled its latest sustainable finance package which covers crucial aspects of environmental, social and governance (ESG) regulation in the EU including the EU Taxonomy, ESG ratings, and transition finance. Prior to the release of the package, the ESG ratings industry had been put on notice as policy action for increased oversight had been gaining momentum. One of the key measures in the package is a proposed regulation seeking to address deficiencies in the operations of ESG ratings providers and enhance transparency around sustainability ratings and scores. A second part of the package expands the Taxonomy Regulation to include new criteria for economic activities related to environmental objectives. In its efforts to facilitate transition finance, the Commission also released a draft recommendation outlining the concept of transition finance, linking it to the Paris Agreement and EU climate neutrality. The latest policy initiative shows that regulators are zeroing down on a balanced approach for providing market certainty and clarity, while not stifling innovation.

Regulation on the transparency and integrity of Environmental, Social and Governance (ESG) ratings activities

The landscape of sustainable finance regulation in the EU continues to evolve, with the spotlight now turning to ESG ratings providers, and their implications on financial stability. In the latest sustainable finance package, the European Commission included a measure to regulate the ratings industry based on the recommendations of the International Organization of Securities Commissions (IOSCO). The European Commission is proposing to establish an authorisation system for EU-based ESG ratings providers, subjecting them to formalised rules and supervision. The proposal emphasizes transparency and would require ESG ratings agencies to publicly disclose their methodologies, data sources and characteristics. The regulation would have major implications for large industry players who could face fines of up to 10% of total annual net revenue for violations and have authorization to provide ratings revoked. This marks a substantial shift in an industry that has experienced rapid growth outside the sphere of regulation.

The purpose of ESG scores is twofold, first – they establish whether a company has sound ESG management policies and internal controls and measures for mitigating sustainability-related risks; secondly – scores adjusted based on a company’s industry provide a universal rating across industries and benchmark a company’s performance relative to its peers. So far, ESG ratings criteria across the industry have been varied and seemingly opaque to users, eliciting criticism from corporates and investors alike. Black box methodologies have been a longstanding issue plaguing the industry and the European Commission’s new rule would dig deeper into ESG scoring by imposing rules on organizational requirements, qualifications of personnel, record-keeping, conflict of interest prevention, and disclosure obligations. To meet these transparency requirements, providers would likely have to reform their governance structures and create guardrails against undue influence that could compromise the objectivity of scores and scoring methodology. With this regulation, the Commission’s key policy objective is to provide clarity to users and improve the functioning of the European single market in relation to sustainable investments.

The new initiative specifically targets legal entities providing ESG ratings to the public or subscribers, excluding financial institutions and other market participants developing ESG ratings for internal use. With the growing importance and influence of ESG ratings, it is essential to have consistent and reliable information to guide investors and promote sustainable finance. To prevent conflicts of interest, the proposed regulation would prohibit ESG ratings providers from engaging in consulting services, investment activities, benchmark development, credit rating issuance, as well as banking and auditing activities. The regulation excludes in-house ratings used by asset managers and benchmark administrators, as they serve different purposes and do not require public disclosure. One might consider this exemption unbalanced, as the same level of transparency is not guaranteed for clients of such asset managers.

The Commission delegates supervision of ratings providers to the European Securities and Markets Authority (ESMA) based on parallel experience in the supervision of credit ratings. ESMA would have the authority to grant or deny authorizations and issue penalties or impose fines for non-compliance. As a first step towards the implementation of the proposed regulation, the European Commission has tasked ESMA with developing draft Regulatory Technical Standards (RTS) that specify the information required for the authorisation of ratings providers. These standards would cover, among others, metadata, data structure, and formats (including specifications for machine-readable authorisation forms). Non-small or medium-sized ESG rating providers are expected to apply for authorization within six months of the regulation’s entry into force.

The proposal includes exemptions and a grace period of 24 months for SMEs applying for authorization. Smaller ratings providers benefit from exemptions and a transition regime during the initial months. Supervision fees are proportionate to annual net turnover to promote a diverse ecosystem of sustainable finance service providers. The proposal also advocates for proportional supervision based on risk assessment, with disclosure of fines and penalties imposed by ESMA to the public in most cases.

By prioritizing public disclosure and accountability of ESG rating providers, this regulation aligns with the broader objectives of the EU’s sustainable finance framework. In furtherance of increased transparency and legislative coherence, ESMA will maintain a register of authorized ERPs on its website and ensure that information is accessible through the European Single Access Point (ESAP). Overall, this proposal reflects a commitment to building a more sustainable and transparent financial system, encouraging data-driven investment practices, and fostering the transition towards a greener future.

EU Taxonomy Delegated Acts

The second measure under the sustainable finance package is designed to enhance the usability of the EU Taxonomy. The European Commission has presented a positive assessment of the current coverage of Taxonomy data, which is a key pillar of the EU’s sustainable finance framework. The data indicates that the Taxonomy is ‘functioning as intended’, with companies in the STOXX Europe 600 index reporting alignment with the Taxonomy for various categories. On average, these companies reported alignment of around 23% for capital expenditure, 24% for operational expenditure, and 17% for revenues. Additionally, almost two-thirds of companies disclosing taxonomy-eligible capital expenditure reported some level of alignment, while half of the companies disclosing eligible revenue also reported alignment. To further strengthen the Taxonomy, the sustainable finance package proposes targeted amendments to the Taxonomy Climate delegated Act and the adoption of technical screening criteria in the Taxonomy Environmental delegated Act.

Targeted amendments to the Climate Delegated Act would expand the coverage of economic activities that contribute to climate change mitigation and adaptation. The focus is on the manufacturing and transport sectors. The amendments illustrate the importance of manufacturing in relation to key components for low-carbon transport and electrical equipment. They also address transitional activities in the transport sector, specifically waterborne transport and aviation, where zero-carbon alternatives are not yet sufficiently advanced. These measures would “incentivize improvements beyond the status quo” while also accounting for economic activities that currently lack feasible low-carbon alternatives but are necessary for the transition toward climate neutrality.
Taxonomy-related enhancements extend to the adoption of the Environmental delegated act technical screening criteria. These amendments are centered around the approval of the remaining four environmental objectives covered in the Taxonomy Regulation. The Act will establish clear and defined technical screening criteria to assess the extent to which economic activities contribute to the sustainable use and protection of water and marine resources, the transition to a circular economy, pollution prevention and control, as well as the protection and restoration of biodiversity and ecosystems. The package also includes disclosure obligations for financial undertakings, set to be implemented from January 1, 2024.

Overall, the proposed enhancements to the EU Taxonomy illustrate the European Commission’s commitment to continuously refining and strengthening the sustainable finance framework. By expanding coverage and defining eligibility criteria, the EU has provided clarity for sustainable finance actors operating in various sectors while also ensuring environmental protection and accountability. The amendments texts are supplemented with a notice that offers guidance on the interpretation and implementation of the Taxonomy Regulation and its connection to the Sustainable Finance Disclosure Regulation (SFDR). The guidance includes frequently asked questions related to the role of minimum safeguards, their definition, expectations for undertakings, and the qualification of taxonomy-aligned investments as “sustainable investments” under the SFDR. The Commission clarifies that investments in taxonomy-aligned environmentally sustainable economic activities can automatically qualify as sustainable investments under the SFDR.

Recommendation on transition finance

The EU’s sustainable finance regulatory framework reinforces the significance of investing in the transition of economic activities, assets, and companies to accomplish climate and environmental objectives. The newly introduced draft recommendations on transition finance in the sustainable finance package advise undertakings to evaluate their transition finance needs through a materiality assessment, taking into account sustainability impacts, risks, and opportunities. It is recommended to define transition targets and pathways based on science-based scenarios and credible transition plans. To further compatibility with EU sustainability regulations, the recommendations contain guidance for undertakings seeking to define transition targets and financial requirements within the broader architecture of EU Taxonomy, EU climate-transition benchmark (CTB) and EU Paris-aligned benchmark (PAB).

The EU Taxonomy provides a framework for undertakings to articulate transition finance needs, especially for covered economic activities under the Taxonomy Regulation. The Taxonomy can be used to plan investments and set milestones and intermediate targets for transitioning economic activities. The recommendations suggest aligning investments with the Taxonomy criteria within a short timeframe and ultimately aiming for full Taxonomy alignment. References to full Taxonomy alignment may seem ambitious. Instead, undertakings may benefit from defining an achievable ceiling for alignment, thereby restoring investor optimism in the pace of transition. Undertakings are encouraged to specify their transition finance needs in terms of capital expenditure, operating expenditure, and revenue associated with achieving climate and environmental targets, as well as revenue related to transitions.

The EU climate benchmarks, in contrast, provide useful tools for investors looking at portfolio decarbonization. The recommendations for transition finance provide that undertakings may use publicly available decarbonization scenarios and pathways, aligned with the Paris Agreement, as references to set science-based targets and determine transition finance needs. The use of EU climate benchmarks and methodologies can complement science-based scenarios and pathways, helping define individual pathways and transition targets. In summary, by aligning with the EU Taxonomy, utilizing science-based scenarios, and leveraging EU climate benchmarks, undertakings can contribute to the achievement of climate and environmental objectives while ensuring long-term sustainability and financial stability.

It is worth noting that the European Supervisory Authorities (ESAs) and national regulators will play a crucial role in supervising and combating greenwashing practices, ensuring the integrity of sustainable finance efforts.


In its current form, the package of measures underscores the need for governance on multiple fronts to ensure the principles of sustainable investing are enshrined across all Union policies. The proposal to regulate ESG ratings providers signals the reckoning of black box methodologies that obscure analysis around ESG ratings. If implemented, the regulation will probe into aspects of the ratings process including analysis and regularity of review, through a system of public disclosure. This system of checks and balances is arguably better than having a voluntary code of conduct for ESG ratings providers, but it might still leave questions unanswered for investors who want to drill down into source data. The regulation acknowledges that all ratings providers are not created equal or alike. Instead of fully-fledged reform by way of prescriptive methodological standards, ratings providers are given carte blanche for formulating unique, proprietary methodologies for assessment, provided the data and supporting analysis is sound. Those awaiting the issues of the four remaining objectives finally have clarity on assessment criteria for activities with environmental objectives with the release of the updated Taxonomy delegated acts. The addition of other climate objectives also shows that this will be a continuously evolving framework that informs other policy documents including the recommendations for securing transition finance. Framing transition finance using the vocabulary of the EU Taxonomy and climate benchmarks may be an effective way of positing sustainability initiatives for a low-carbon future. The three policy measures combined address a range of issues directly influencing capital allocation towards sustainable investments.

Scope 3

Awareness around the benefits and challenges of measuring Scope 3 emissions – those connected with a company but not produced as a result of their own direct operations or energy consumption – has grown rapidly over the past year.

This article demonstrates how Scope 3 emissions are essential in determining who is at the forefront of the race to net-zero, and why material reporting is key in being able to accurately assess corporate decarbonisation progress.

To read the full article, click here.

ESG Policy Digest: May

Last month, the EU Parliament proposed stringent minimum requirements for verifying and communicating green claims, explicitly banning carbon offsetting-based claims. This move aims to ensure that environmental claims made by businesses are backed by credible evidence, fostering consumer trust in sustainable products and practices. In parallel, the European Commission (EC) adopted the Retail Investment Package, a comprehensive set of measures designed to safeguard long-term investments and enhance consumer protection. Addressing environmental, social, and governance (ESG) concerns, the European Supervisory Authorities submitted draft regulatory standards to the EC. These standards seek to enhance ESG disclosure in securitization regulations, enabling market participants to make more informed investment decisions aligned with sustainability goals. To facilitate access to vital financial and sustainability-related information, the EU reached provisional agreement to establish the European Single Access Point (ESAP). This centralized platform will provide investors with valuable insights into EU companies, planned to release in 2027.

Across the English Channel, the United Kingdom is undertaking a review of its non-financial reporting requirements. Seeking to streamline reporting burdens and align with the EU framework, the UK aims to create a general framework that measures non-financial performance, benefiting companies operating within the EU.

In North America, Canada has taken a pivotal step to combat issues of forced labour and child labour in supply chains by enacting the ‘Fighting Against Forced Labour and Child Labour in Supply Chains Act’.

Meanwhile, the New Zealand government launched a consultation to reform the Emissions Trading Scheme (ETS) considering changes such as auction limits, reserve prices, and cost containment mechanisms. Taking a page from OECD’s Guidance on responsible business conduct, Japan’s Ministry of Environment released a complementary handbook on environmental due diligence. This is just a snapshot of the ESG policy updates that we are featuring this month. Scroll further to read more.

EU Parliament to ban green claims based on carbon offsetting

The Commission and EU Parliament have proposed minimum requirements for businesses to verify and communicate green claims. The proposed rule aims to promote environmentally friendly choices and sustainable products. If enforced, companies would have to provide independent verification of environmental impacts related to their products. The EU Parliament also added a ban on carbon offsetting-based claims and backed the validation of “carbon and climate neutral” labels with science-based targets and detailed implementation plans. Products that fail to substantiate environmental claims would face a ban in the EU market. To promote the EU’s central sustainability objective of a circular economy, the proposed rule would further prohibit product design features promoting premature obsolescence and limited product durability. Read more

EC adopts Retail Investment Package to protect long-term investments

The Retail Investment Package aims to empower retail investors, ensure fair treatment and protection and build trust in the EU’s Capital Markets Union. The objective is to make the EU a safer place for long-term investment and encourage participation in capital markets. Measures to address consumer protection include improving information disclosure to investors, increasing transparency of costs, providing clear investment performance views, addressing conflicts of interest and protecting against misleading marketing. The package revises existing rules in various directives and regulations, including MiFID, covering different financial instruments. Read more

European Supervisory Authorities submit draft RTS to enhance ESG disclosure in securitisation regulations

The three European Supervisory Authorities (EBA, EIOPA, and ESMA) have jointly submitted Draft Regulatory Technical Standards (RTS) to the European Commission regarding the disclosure of environmental, social, and governance (ESG) impacts for Simple, Transparent, and Standardised (STS) securitisations under the Securitisation Regulation (SECR). These standards aim to provide market participants with information to make informed decisions about the sustainability impact of their investments, particularly for STS securitisations involving residential loans, auto loans, and leases. The proposed technical standards align with those developed under the Sustainable Finance Disclosure Regulation (SFDR), distinguishing between mandatory indicators (such as energy efficiency) and additional indicators (such as emissions) for disclosure. The European Commission is expected to endorse these RTS within three months of their submission.Read more

Provisional agreement on easy access to corporate sustainability information

The European Union (EU) has reached a provisional agreement to establish a centralized platform – European Single Access Point (ESAP) – that will provide access to public financial and sustainability-related information about EU companies and investment products. The platform will enhance the integration of financial services and capital markets within the EU, aligning with the objectives of the Capital Markets Union. Additionally, the platform will prioritize sustainability information, aligning with the goals of the European Green Deal. ESAP will not impose additional reporting requirements on European companies. Instead, it will grant access to information already disclosed in compliance with relevant European directives and regulations. The ESAP platform is expected to be available from summer 2027, with a phased implementation to ensure robustness. The initial phase will include information related to EU regulations on short-selling, prospectus information and the transparency directive.Read more

United Kingdom
UK conducts review of non-financial reporting requirements, aiming to streamline reporting burden and align with EU framework

The Department for Business and Trade (DBT) in collaboration with the Financial Reporting Council (FRC) is conducting a review of the UK’s non-financial reporting requirements. In the UK, the non-financial reporting requirements are primarily governed by the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013. Additionally, requirements may differ based on the size and nature of the company. The purpose of the review is to ease the reporting burden for companies operating across the EU by co-opting a general framework to measure non-financial performance. The review will also consider the appropriateness of the current company size thresholds, which determine specific non-financial reporting requirements, and the preparation and filing of accounts with Companies House. Read more

North America
Canada enacts the Fighting Against Forced Labour and Child Labour in Supply Chains Act

Canada’s Modern Slavery Act (MSA) to combat forced labour and child labour in supply chains, was successfully passed on May 3, 2023. This significant legislation will be enforced starting from January 1, 2024. Following its implementation (as of May 31, 2024), government institutions, private-sector entities, and importers that meet a specified threshold are obligated to report on the measures taken to prevent and mitigate the risk of forced labour and child labour across their supply chain operations. Canada’s MSA also amends the Customs Tariff, effectively enabling the prohibition of importing goods that have been wholly or partially manufactured or produced using forced labour or child labour, as defined in the Act. Read more

Asia pacific
New Zealand government launches consultation for the reform of emissions trading system

The New Zealand Emissions Trading Scheme (NZ ETS) is a vital tool in the government’s response to climate change, as it places a price on greenhouse gas emissions to help achieve emissions reduction goals. Businesses are required to surrender carbon credits (NZUs) for their emissions, which can be obtained through government auctions or traded in the secondary market. The government regularly updates auction limits, price controls, and other settings. Based on recommendations from the Climate Change Commission, the government is considering reducing auction units, increasing reserve prices, and introducing a two-tier cost containment reserve. Public consultation is currently open to gather input on these proposed changes, and submissions from stakeholders in the NZ ETS are welcome.Read more

Japanese Ministry of Environment publishes guidelines on environmental due diligence

Building on the OECD’s Responsible Business Conduct guidelines, the Ministry of Environment unveiled a handbook titled ‘Introduction to Environmental Due Diligence in the Value Chain – Implementing Environmental Management Systems (EMS) for Practicing Environmental Due Diligence.’ As regulatory demands for sustainability reporting continue to rise, Japanese companies and investors have taken the initiative to adopt ‘Environmental Management Systems’ that promote environmental preservation throughout their business practices and administration. The recently introduced guidance aims to enhance the standardization of procedures, enabling compliance with due diligence obligations outlined by the OECD, while also supplementing ongoing processes of incorporating environmental factors in governance and risk management.Read more

Other News & Resources

  • SBTN launches science-based targets for freshwater and land. Read more
  • The Network for Greening the Financial System (NGFS) issues a call for expression of interest to develop short-term climate scenarios with submissions accepted until June 15 and analytical implementation anticipated in the third quarter of 2023. Read more
  • ISSB seeks feedback to enhance the international applicability of SASB standards. Read more
  • UK FRC launches public consultation to strengthen directors’ responsibilities and reporting practices. Read more


Have we missed anything?
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SFDR Implementation Countdown: Global Implications for Asset Managers


Sustainability is no longer a niche concern but a crucial aspect of modern business practices. In the European Union, the Sustainable Finance Disclosure Regulation (SFDR) is playing a significant role in driving sustainable investments by increasing transparency and standardisation. As financial institutions gear up for SFDR implementation, they face various data challenges that require careful navigation. The SFDR has already reshaped the landscape of sustainable finance. As asset managers offering sustainable financial products in the EU market gear up for SFDR Principal Adverse Impact (PAI) statements reporting by 30th June, they must navigate a complex web of data challenges to meet regulatory requirements effectively. In this article, we explore the intricate implications of SFDR for asset managers globally, highlighting the data hurdles they must overcome to seize the opportunities presented by sustainable investing.


Understanding SFDR

The SFDR aims to promote sustainability within the financial sector by providing investors with reliable and comparable information on environmental, social, and governance (ESG) factors. It introduces mandatory ESG-related disclosure obligations for financial market participants, including asset managers, investment advisors, and insurance companies. SFDR classifies financial products into three levels, each with different disclosure requirements: Article 6, Article 8, and Article 9. These levels help investors identify and understand the sustainability characteristics of investment products.


Navigating Data Challenges

One of the primary challenges for SFDR implementation lies in the availability and quality of ESG data. Financial institutions must source relevant ESG data to assess the sustainability characteristics of their products accurately. However, ESG data can be diverse, unstructured, and fragmented. SFDR implementation necessitates addressing several data challenges, ranging from availability and quality to standardization and reporting. This makes it difficult for organizations to compare and assess ESG data consistently. The SFDR has made efforts to address this challenge by mandating the use of various ESG disclosure standards and sustainability benchmarks. However, organizations still need to invest in data mapping, classification, and taxonomy development to align their data with SFDR requirements and enhance comparability across products and markets.

Asset managers must establish robust data collection mechanisms, collaborate with data providers, and invest in data management systems to ensure accurate and reliable ESG data. Seamless integration of ESG data into existing reporting frameworks, supported by efficient data governance practices, is vital for generating accurate and comprehensive reports. Lastly, asset managers need to stay abreast of regulatory changes and adapt their data management processes to remain compliant as the ESG landscape evolves.


Differentiation and Competitive Advantage

SFDR implementation offers asset managers an opportunity to differentiate themselves in the marketplace. By effectively communicating their sustainable investment strategies and demonstrating robust ESG integration, asset managers can attract environmentally and socially conscious investors. Meeting SFDR data challenges positions asset managers as leaders in the sustainable finance space, providing them with a competitive edge.


Enhanced Risk Management and Informed Decision-Making

SFDR implementation compels asset managers to deepen their understanding of ESG risks and opportunities. By collecting, analysing, and integrating ESG data, asset managers gain valuable insights into the sustainability performance of companies and industries. This empowers them to identify potential risks, assess the long-term viability of investments, and make more informed decisions, enhancing risk management practices and generating sustainable financial returns for their clients.

SFDR compliance also necessitates the integration of ESG data into existing reporting frameworks. Financial institutions must ensure seamless data integration across multiple systems and platforms to generate accurate and comprehensive reports. This requires efficient data governance practices, data consolidation, and the development of automated reporting processes. Furthermore, organizations must also consider the ongoing nature of SFDR reporting and establish mechanisms to update and maintain ESG data regularly.


Collaboration and Innovation

SFDR implementation encourages asset managers to collaborate with ESG data providers, rating agencies, and sustainability experts. These partnerships facilitate access to high-quality ESG data, improve data accuracy and consistency, and drive innovation in sustainable finance. The ESG landscape is dynamic, with evolving regulations, new reporting requirements, and emerging sustainability standards. Engaging with the wider ESG ecosystem enables asset managers to leverage expertise, enhancing their ESG data capabilities and staying ahead of market trends.


Cultural Shift towards Sustainability

SFDR implementation necessitates a cultural shift within asset management organizations. It requires a cross-functional approach, involving investment teams, data scientists, compliance officers, and senior management. By fostering a culture that values sustainability and integrating ESG considerations throughout the investment process, asset managers can develop new strategies, products, and services that align with sustainable objectives. This shift strengthens the overall resilience and long-term success of asset management firms.



As financial institutions embrace SFDR implementation, they face several data challenges that need to be effectively managed. From ensuring data availability and quality to standardization, integration, and staying up-to-dare with regulatory changes, organizations must invest in robust data management practices. By addressing these challenges head-on, financial institutions can navigate SFDR reporting more successfully, foster transparency, and drive sustainable investment decisions. Embracing data as a strategic asset will not only enable compliance but also unlock opportunities for improved decision-making and long-term sustainability.


Learn more about how ESG Book’s SFDR Data Solutions can help meet your reporting needs.