EU banks are 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 your 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.

As of now, banks often rely on capital market data vendors like Bloomberg and MSCI because non-public companies have yet to commence reporting. 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.

Your vendor needs to do more than offer pre-collected data on public companies. They should provide complete portfolio analysis, entity resolution, CSRD filtering, and actual data collection on public and non-public counterparties. Like classic credit risk management, some parts of sustainability risk management can be handled internally, but challenges this big are usually met by external vendors who handle key stages of the risk management workflow.

It all 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. Shifting the burden of entity resolution to a vendor like ComplyTaxonomy.EU offers a viable solution. However, any such service must receive proper approval from compliance and tech to prevent internal data leakage. This approval and onboarding process should be completed upfront, well before the looming regulatory deadline.

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 doesn'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. Similar to the previous stage, outsourcing CSRD filtering is a great option to reduce costs, time, and regulatory risks. However, any such service involving internal data access must be initiated upfront.

The process extends to actual data collection, involving monitoring publications on companies' websites, a major challenge in case of non-public companies. Once identified, the EU Taxonomy presentation must be scraped and accurately interpreted. This 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. While this is seamless with ComplyTaxonomy.EU, classic data vendors often complicate matters by exposing data only in their format via their API. Parsing, interpreting, and integrating such data can consume weeks of tech resources before it's usable.

Finally, there's an assurance process by the institution's auditors, who manually verify data samples and typically require a source for each datapoint. ComplyTaxonomy.EU streamlines this with a single-click tech feature, unmatched by others.

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.

Market leaders have recently commenced their preparations, understanding the urgency posed by the impending regulatory deadlines for the 2025 challenge.