Sustainability reporting in asset management: barriers and benefits

Do sustainability disclosures have a trust issue?

Sustainable investing has become a key focus for investors, with 70% believing that environmental, social and governance (ESG) factors should be integrated into the corporate strategy of investee companies, according to our latest Global Investor Survey. Various regulatory regimes at local and regional levels have been enacted recently, focusing on reporting requirements and sustainable investing disclosures. The primary reason for this increased regulation is to protect investors from mis-sold products and combat greenwashing. However, one crucial question remains: are these disclosures trusted?

While regulatory guidance outlines required disclosures, practical application still necessitates judgement. This is evident in the FAQs from the European Commission on the Corporate Sustainability Reporting Rules and the consolidated questions and answers on the Sustainable Finance Disclosure Regulation (SFDR) and its delegated regulation. Consequently, inconsistency and uncertainty persist in applying these regulations, leading to a lack of comparability across the industry and fundamentally reducing transparency for readers. Moreover, the most significant barrier remains the availability of credible, reliable and quality data.

European sustainability reporting regimes

SFDR and the Corporate Sustainability Reporting Directive (CSRD) are two comprehensive sustainability disclosure regimes. Both regulations, which include overlays of the EU Taxonomy Regulation, apply directly to funds and several fund service providers (FSPs) across Europe and Ireland.

Sustainable Finance Disclosure Regulation (SFDR)

SFDR mandates that financial products, such as funds, make disclosures to investors and also applies at the entity level for FSPs. While many have advocated for change, there are currently no requirements for third-party assurance over these disclosures. However, as the regulation becomes more established, it is likely that some level of third-party assurance will be required in the coming years.

Corporate Sustainability Reporting Directive (CSRD)

CSRD reporting requirements took effect for periods beginning on or after 1 January 2024. Although Undertakings for Collective Investment in Transferable Securities (UCITS) and Alternative Investment Funds (AIFs) are not subject to CSRD, many entities in the funds industry incorporated under the Companies Act, such as management companies, depositories and special purpose vehicles (SPVs), will potentially fall within scope by FY26, subject to size thresholds. Unlike SFDR, CSRD reporting is subject to limited assurance. As more companies fall under CSRD, the availability of assured sustainability data is expected to increase.

Current barriers to accurate sustainability reporting

Data

The availability, accuracy and quality of data remain significant barriers to accurate sustainability reporting. Given the relative immaturity of non-financial reporting and specific reporting requirements, it’s unsurprising that over 95% of firms view data availability and quality as obstacles to implementing CSRD requirements, according to PwC’s Global CSRD Survey. While many third-party data providers support firms, selecting the most suitable provider requires significant due diligence due to varying data sets, coverage and product types. Gathering audit-ready CSRD data is a complex task, demanding accuracy and comparability akin to financial statements, setting CSRD apart from previous standards.

Regulatory Complexity

Sustainability reporting regulations are inherently complex and are expected to evolve over the coming years, with sector-specific requirements anticipated under CSRD and revisions to both Level 1 and Level 2 SFDR. Establishing and implementing the necessary systems to meet these evolving requirements will undoubtedly increase pressure on firms’ resources, skill sets and focus on other business areas, ultimately impacting budgets. Additionally, initial interpretations of these regulatory frameworks pose significant obstacles for firms in fulfilling their reporting obligations, particularly for those operating in different locations with varying local requirements.

Is sustainability assurance the answer?

Greater access to assured data

Although the initial assurance required under CSRD is limited, the expected move to reasonable assurance in the future should begin to address concerns about the reliability of non-financial data. This will not only increase the availability of comparable and transparent data but also likely make the underlying data used by SFDR reporters more reliable, providing greater comfort to investors.

Greater access to capital

Assured sustainability disclosures can better position entities to attract capital, especially as lenders and investors increasingly prioritise sustainability. By directing capital towards more sustainable entities, stakeholders can also align their investments with their own sustainability objectives.

Build confidence in your ESG reporting

Firms can gain valuable insights from an independent assurance provider on whether their ESG reporting strategy can withstand scrutiny. The assurance process can identify gaps in reporting, limitations of current controls and areas for improvement. Overall, this process can help bolster your company’s confidence in the procedures and oversight necessary to produce complete and accurate ESG data.

We are here to help

At PwC, our dedicated teams are equipped to assist your firm in navigating the complexities of sustainability reporting and assurance. We offer comprehensive support to ensure your firm meets and exceeds regulatory requirements. Whether you are just starting or are well into your sustainability journey, we are here to provide the expertise and guidance you need.