The Open Data Institute              FSUK0026

Written evidence submitted by The Open Data Institute

About the ODI: The ODI is a non-profit with a mission to work with companies and governments to build an open, trustworthy data ecosystem. Founded in 2012 by Sir Tim Berners-Lee and Sir Nigel Shadbolt, we work with a range of organisations, governments, public bodies and civil society to create a world where data works for everyone.

About this evidence submission: We’re submitting evidence to this inquiry in order to share our expertise on one of the topics highlighted by the Committee in its call for evidence: 'The potential effectiveness of the financial sector, including through alliances such as GFANZ, in encouraging the decarbonisation of the economy in time to limit global temperature rises to 1.5°C.'

Executive summary              2

Background information              3

Greening the financial sector              3

The threat of greenwashing              3

Data assurance and the UK’s net zero transition              6

Actions for GFANZ: embedding data assurance in green finance              9

Executive summary

The Glasgow Financial Alliance for Net Zero (GFANZ) was launched in April 2021 as 'a forum for leading financial institutions to accelerate the transition to a net-zero global economy'.[1] GFANZ envisages a leading role for the financial sector in encouraging rapid decarbonisation and limiting the rise in global temperatures to 1.5°C.

At the ODI, we believe that the GFANZ mission can only be achieved if it plays an active role in reshaping and ‘greening’ the financial system. This means investors having confidence that their decisions about where to allocate capital are underpinned by trustworthy data on the environmental risks and impacts associated with potential investments.

At present, however, confidence in this data is compromised by the prevalence of greenwashing: ‘the practice of making misleading or unsubstantiated claims about the environmental performance of economic activities or investment products’.[2]

We believe that the wider uptake of data assurance activities in the financial sector can reduce greenwashing and support decarbonisation efforts. Data assurance refers to practices such as audit and certification which 'increase confidence that data will meet a specific need’.[3]

Alliances such as GFANZ have an important role to play in embedding data assurance within the financial sector; we therefore advise the House of Commons Environmental Audit Committee (EAC), in its letter to GFANZ members, to urge them to take up actions including:

●        Action 1 – develop clear definitions and standards, including by requiring consistent mandatory reporting standards for firms and investment products and encouraging the adoption of open, interoperable data standards;

●        Action 2 – drive and direct the growth of data assurance by stimulating demand and regulating to ensure the services provided are of the requisite quality;

●        Action 3 – future-proof data assurance by researching trends such as the increasing use of alt data and AI systems in producing disclosures.

For more detail on these actions, please see the final section of this submission. For more detail on the issues examined in this submission, please refer to the following publications:

●        'Tackling greenwashing through data assurance', which sets out the role of data assurance in green finance.[4]

●        'Regulators, industry bodies and professional bodies: their role in data assurance', which indicates how industry bodies such as GFANZ can support data assurance practices within their sectors.

Background information

Greening the financial sector

The financial sector has an important role to play in encouraging decarbonisation, and as a global coalition of leading financial institutions GFANZ has a particular responsibility to support the ‘greening’ of the financial system, ensuring that climate risks and impacts are central to investment decisions. For this to happen investors need to have confidence that their decisions about where to allocate capital are underpinned by trustworthy data on the environmental performance of potential investments.

Many organisations already offer services aimed at facilitating this through the analysis and reporting of climate risks and impacts associated with particular sectors, companies and their activities. These firms, which range from data providers and vendors to environmental, social and governance (ESG) investment funds, indexes and ratings agencies, are fundamentally data businesses. The way they create impact can be understood in terms of the ODI’s established concept of the 'data value chain':[5]

●        companies and data providers steward environmental performance data: collecting it, maintaining it and sharing it;

●        companies, asset owners and financial organisations create information from this data in the form of analyses, insights, and visualisations, which are disclosed to investors;

●        investors (both institutional and retail) make decisions about how to invest on the basis of this information and other factors.

When this chain is functioning properly, investors can have confidence that their decisions about where to allocate capital are underpinned by trustworthy data on the environmental performance of potential investments.

For alliances such as GFANZ to fulfil their role in supporting the effectiveness of the financial sector to decarbonise, they will need to attend to each step in the data value chain: not solely the decision-making and information-creating stages at which investors and financial organisations typically sit, but also the stewardship stage upon which these later stages depend.

The threat of greenwashing

GFANZ and its member organisations will also need to play a role in reducing the incidence of practices that disrupt the data value chain and damage efforts to coordinate the financial system towards accelerated decarbonisation.

We refer to these practices as greenwashing: defined in the UK government’s Green Finance Roadmap as ‘the practice of making misleading or unsubstantiated claims about the environmental performance of economic activities or investment products’.[6] For example, asset managers and corporate managers might choose to not disclose relevant information if it presents their activities in a negative light; or might disclose information in a way that is not comparable across different investment products and firms; or might disclose information that is unsubstantiated or otherwise misleading. This distorts the information available to financial decision-makers and means that markets may not accurately reflect climate change-related risks and impacts.[7]

60% of the respondents to the 2021 Schroders Institutional Investor Study cited greenwashing as a major concern; more than any other issue.[8] Erik Thedéen, chair of the sustainable finance task force at the International Organization of Securities Commissions (Iosco), has argued that ‘greenwashing could damage the credibility of the green finance movement, endangering the work to limit the rise in global temperatures to 1.5°C.’[9]

The prevalence of greenwashing in green finance is therefore not only a problem for specific companies and investors. By eroding trust and impeding coordination around urgent climate action, greenwashing risks discrediting the green finance agenda, derailing GFANZ’s ambition of  accelerating the transition to net zero and slowing the pace of decarbonisation when the world can least afford it.

Our new publication ‘Tackling greenwashing through data assurance’ identifies three main structural features of the green finance system that currently enable greenwashing, and to which we believe coalitions such as GFANZ ought to attend:[10]

●        Inconsistency of frameworks, definitions, ratings and standards. This creates opportunities for companies and investors to ‘shop around’ for indicators that are more favourable to them, rather than indicators that are most rigorous or robust.[11] Data assurance can contribute to the consolidation of standards by driving their wider adoption.

●        Lack of transparency as to how data is being used to produce insights and make decisions. Organisations may claim to make decisions on the basis of environmental performance information underpinned by sound data, but decline to make the information public because of uneven transparency requirements – a problem which is exacerbated by the global nature of supply chains and varying transparency obligations in different jurisdictions. The assurance of data and data practices used in green finance can help to tackle this by creating an expectation of transparency to investors and regulators on how disclosures are being produced.

●        Lack of accountability to external stakeholders as a result of weak institutional arrangements. In other words, even when decisions and the information and data used internally are transparent, poor or non-existent accountability mechanisms can mean that harmful activities continue unabated. Third-party data assurance (i.e., assurance products and services procured from another business or organisation) can remedy this by introducing accountability to external parties into processes that are currently internal.

Data assurance and the UK’s net zero transition

We believe that the presence of a vibrant ecosystem of organisations providing data assurance products and services can help to ensure the proper functioning of the green finance data value chain, providing investors with trustworthy information and aiding efforts to decarbonise finance. Alliances such as GFANZ will have an important role to play in embedding data assurance practices within the financial sector and ensuring the growth of a robust B2B data assurance market. This section (‘Data assurance for accelerating the transition’) indicates why we believe GFANZ should take an interest in data assurance as a solution to greenwashing.

Data assurance is 'the process, or set of processes, that increase confidence that data will meet a specific need, and that organisations collecting, accessing, using and sharing data are doing so in trustworthy ways'[12]. It includes formal practices such as audits, certification or accreditation schemes, as well as less formal practices such as the provision of advice and the development of norms.

These activities will be relevant at each stage in the green finance data value chain, helping to ensure that:

●        the right data is collected and shared, and that its collection and reporting follows appropriate standards;

●        organisational processes for reporting and insight creation are compliant with legal and regulatory requirements and comparable across different companies and investment products;

●        decision-making processes adequately take into account and respond to the information created from data.

At the data stewardship stage of the green finance data value chain, individual companies and specialist data providers or vendors collect, maintain and share data on environmental impacts and risks (including both transition risks and physical risks).[13] The following data assurance activities could be relevant at this stage to GFANZ’s mission of accelerating the transition to net zero:

●        Assurance of data practices relevant to the stewardship of data on environmental risks and impacts, including the appropriate acquisition and sharing of data and organisational governance; management of risks around that data, including greenwashing or misrepresentation risks; and data management policies and processes once the data has been collected or procured. Activities to help provide assurance here could include checking that the company has a proactive and well-informed strategy for the acquisition of relevant data; ascertaining that data access and management processes are being followed, and that they are in line with the company’s data strategy; or more formal mechanisms such as external audit or certification of the above processes to an areed industry standard.

●        Assurance of the data used to assess environmental risks and impacts, particularly its provenance (where it is from and how it was produced); validity (its accuracy and quality); linkability with other relevant datasets; and risks related to its use for assessing environmental risks and impacts. Activities to help provide assurance here could include providing documentation to support understanding of context and limitations in the data relating to its usefulness in assessing climate impacts and risks;[14] or validation against a set of standards.

At the insight-creation stage, companies, indices and ratings agencies use the data created at the stewardship stage to create insights into environmental performance and climate-related risks for disclosure to investors. The following assurance activities could be relevant at this stage to GFANZ’s mission of accelerating the transition to net zero:

●        Assurance of data practices relevant to the creation of insights, including the presence of relevant skills and knowledge (for instance, expertise in environmental and climate science), the adoption of an appropriate strategy for the creation of relevant insights, and the suitability of data analysis processes (for example that they are repeatable and transparent). Activities to help provide assurance here could include the certification of organisational processes against standards and advice from external experts such as environmental scientists.

●        Assurance of the data being used to create insights, particularly its interoperability with other datasets that it might need to be linked or combined with, and its compliance with any legal and or regulatory expectations. Activities to help provide assurance here could include licensing around reuse permissions; or validation against a set of standards.

●        Access to data assurance outputs from the previous data stewardship stage.

At the decision-making stage, investors (both retail and institutional) use the insights that have been created to inform their transition plans and guide investment decisions. The following assurance activities could be relevant at this stage to GFANZ’s mission of accelerating the transition to net zero:

●        Assurance of data practices relevant to the decision-making stage, including that data users have been appropriately engaged and supported throughout; that decisions have been informed by data and insights which the company is justifiably confident in; and that the limitations of those data and insights are known. Activities to help provide assurance here could include checking organisational processes against certain predefined standards.

●        Access to data assurance outputs from the previous insight-creation stage.

Actions for GFANZ: embedding data assurance in green finance

The outlook for data assurance in the UK is positive, with research for the ODI finding that the B2B data assurance sector – including firms offering assurance services for climate data – is growing at a rate of 12% per year, with the market projected to quadruple in size by 2025.[15] [16] Despite this, downstream barriers and market failures might limit the growth of data assurance in the green finance sector. If this is the case, further action might be necessary to bring about a vibrant ecosystem of organisations providing data assurance products and services for greening finance.

Our recent report ‘Tackling greenwashing through data assurance’ identifies three areas that will require further investigation and intervention in order to embed data assurance practices in green finance and help the sector realise its full potential.[17] As an influential coalition of financial institutions, GFANZ has an important role to play in catalysing these activities by using its convening and guidance-setting capabilities to influence the ecosystem.

Action 1 for GFANZ – supporting the development of clear definitions and standards, including by:

●        providing consistent reporting standards for sustainability disclosures for firms and investment products, with clear, usable definitions of the risks and impacts that ought to be reflected in sustainability reporting;

●        supporting open standards for data for sustainability reporting, ensuring that data used for disclosures is interoperable and comparable across different investment products and firms;

●        taking steps to ensure that standards and ratings providers are trustworthy and trusted, not only by investors and companies but by the environmental and scientific communities, and the wider public.

Action 2 for GFANZ – driving and directing the growth of the assurance sector, including by:

●        monitoring demand and uptake of assurance services, and quality of disclosures, and if necessary taking steps to stimulate demand for assurance services;

●        shaping and maintaining quality in assurance services for green finance, including by providing accreditation to trusted providers.

Action 3 for GFANZ – future-proofing data assurance by conducting or commissioning research into trends such as:

●        the prevalence of missing data for disclosure requirements;

●        the increasing use of alternative data or 'alt-data' sources, which the ODI defines as 'data that is commonly used and analysed in a certain domain, put to a different or new use', such as the use of agricultural, transport or retail datasets in finance;

●        the need for assurance of Artificial intelligence (AI) systems, which are increasingly used at the insight creation stage of the green finance data value chain to create more sophisticated analyses and insights from data;[18] and

●        the emergence of data institutions that steward data relevant to green finance.[19]

In addition to these these specific recommendations, which pertain to embedding data assurance in green finance in particular, our report 'Regulators, industry bodies and professional bodies: their role in data assurance' indicates how industry bodies – including coalitions and consortia such as GFANZ – can support data assurance practices within their sectors.[20]

June 2022