Datafication of Sustainable Finance
Research paper by Dirk A. Zetzsche, Marian Unterstell, Ross P. Buckley, and Douglas W. Arner (1)
In the wake of the Paris Agreement of 2016, the EU Sustainable Finance Action Plan of 2018 and the EU Green Deal of 2019, the ongoing implementation of the EU's Sustainable Finance Strategy has led to a significant development of EU law with a view to financing and facilitating the transition of the real economy towards sustainability.
We argue first that this strategy, at its core, is a data strategy, requiring the datafication of the entire European financial, production and services sector. By taking into account sustainability data, the ongoing process of datafication prompted by digitalization of finance will extend to data concerning externalities previously not incorporated into quantitative financial models and analysis.
Second, we look at other datafication processes in finance to identify regulatory lessons for the EU's sustainable finance framework. On that basis we present policy recommendations with a view to furthering datafication of sustainable finance by way of financial regulation.
In particular, we recommend the implementation of digital reporting
standards developed in tandem by industry and regulators, the utilization of Green RegTech and SupTech, centralized and enabled via digital reporting infrastructure such as the European Single Access Point, and the facilitation of the use of official estimates to ensure proportionality.
Key Takeaways:
Sustainable Finance and Datafication:
The paper focuses on the link between sustainable finance and datafication in the context of financial regulation, highlighting how these two themes work synergistically to support sustainable development.
Legislative Backbone:
The EU’s Sustainable Finance Framework is built on the Sustainable Finance Action Plan (2018) and the Renewed Strategy for Financing the Transition (2021), resulting in at least ten legislative acts, including:
The Taxonomy Regulation (standardized environmental sustainability definitions),
The Sustainable Finance Disclosure Regulation (SFDR),
The Corporate Sustainability Reporting Directive (CSRD).
Double Materiality:
Reporting entities are required to report on both:
Sustainability risks impacting their business,
Their own impact on sustainability factors.
Datafication as Central:
Sustainability data generation, aggregation, processing, and disclosure are at the heart of these legislative acts. The EU’s legal framework has significantly propelled the demand for sustainability data.
Growing Market for Sustainability Data:
The global market for sustainability data reached $1.3 billion in 2022, with Europe representing 60% of the market.
Digitalization and Regulation Depend on Data:
Sustainable finance regulation depends on digitalization, particularly data standardization, automation, and the integration of data analytics in financial services and regulatory processes (RegTech and SupTech).
European Single Access Point (ESAP):
The development of new infrastructure like the European Single Access Point (expected by 2027) will be crucial for enabling the digital transmission, validation, and use of sustainability data.
Balancing Costs and Benefits:
Policymakers must ensure that the costs of implementing these digital processes are balanced with the benefits, particularly in reducing transaction costs and promoting efficiency across the financial system.
(1) Zetzsche, Dirk Andreas and Unterstell, Marian and Buckley, Ross P. and Arner, Douglas W., Datafication of Sustainable Finance (June 28, 2024). UNSW Law Research Paper No. 24-19, Available at SSRN: https://ssrn.com/abstract=4879687
(2) Related read: FinTech: Finance, Technology and Regulation
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