The 2025 Crunch

Financial institutions in Europe are the primary users of regulatory sustainability data reported by companies under regulations such as CSRD and EU Taxonomy. The law obliges these institutions to collect this new data on their counterparties, then aggregate and report it on an aggregated basis for their assets, portfolios, and income.

They are now gearing up for a monumental task — overhauling their entire sustainability reporting process to accommodate a significantly increased volume of sustainability disclosure from counterparties by 2025.

Forget about ESG ratings, scores, and other arbitrary metrics commonly used by financial institutions. The upcoming change is about embracing new disclosures and official accounting standards not just from a few but from the majority of counterparties, crucially including thousands of non-public entities.

The challenge involves collecting, aggregating, analyzing, and integrating new corporate disclosures into internal systems, a task akin to building an entire credit risk process from scratch.

Currently, financial institutions often rely on capital market data vendors like Bloomberg because the majority of companies in scope of the regulations are active in capital markets. However, it's crucial to recognize that depending on these vendors for the time being is not a sustainable approach. They will inevitably need replacement when private companies start reporting. Relying on such public data vendors to build internal processes is not only a temporary solution but also a waste of resources. It complicates the adoption and integration of new reporting standards, posing a future challenge to meeting regulatory deadlines.

The compliance business process starts with entity resolution, matching counterparty names and IDs in a financial institution's internal database with entities in the vendor's database. Usually managed by the client, this task becomes a major pain point when onboarding a new vendor.

The workflow then moves to CSRD filtering. Financial institutions must identify which counterparties fall under the scope and are obligated to make non-financial disclosures. Although CSRD criteria don't seem overly complex, filtering can take months for sizable portfolios. Additional complexity arises from the need to analyze group structures and collect parent data when appropriate exemption statements are made.

The process extends to actual data collection, involving monitoring publications on companies' websites, a major challenge in the case of non-public companies. Once identified, the data presentation must be scraped and accurately interpreted. When it comes to EU Taxonomy presentations, its format is intricate and continuously evolving, extending well beyond main KPIs like shares of aligned revenue, capex, and opex. It encompasses detailed activity breakdowns as per regulatory templates, information on enabling and transitional activities, and contributions to climate change mitigation and adaptation. The presentation format is projected to expand further and become akin to a standalone accounting standard. Handling this data demands a deep understanding of regulations, continuous learning to keep pace with regulatory changes, and, finally, accurate interpretation and normalization for comparability across the entire portfolio. Achieving this is a challenge that necessitates comprehensive knowledge of how EU Taxonomy numbers are presented in practice.

The next step is data integration and aggregation. The data received from the vendors also needs to be parsed, interpreted, and integrated internally, which consumes weeks of tech resources before it's usable by the business. Finally, there's an assurance process by the institution's auditors, who manually verify data samples and typically require a source for each datapoint, which is a major pain point for auditors.

There is little doubt that implementing and maintaining this entire workflow will result in annual costs reaching millions of euros, even for small banks. The transition's complexity is further increased by the need to find and integrate new vendors capable of scraping data on non-public companies and working with the bank's internal data.

The path to meeting the 2025 sustainability reporting requirements is fraught with challenges, but with the right guidance and tools, it is entirely manageable. Our expertise in regulatory compliance and sustainability data integration can help you navigate this complex terrain. By collaborating with us, you can streamline your reporting processes, ensure accuracy, and stay ahead of regulatory changes. Don't wait until the last minute – contact us now to start preparing for a successful transition.

Best regards,

ComplyTaxonomy.EU