RegTechs Drive Innovative Compliance as EU Strengthens Regulation

While the rise of environmental, social and governance (ESG) investing has been instrumental in the success of the fossil fuel divestment movement so far, critics argue that recent changes to the European Union’s ESG taxonomy threaten the current momentum.

Earlier this year, the addition of natural gas to the EU’s list of sustainable investments was met with a fierce backlash from environmental campaigners and even provoked the threat of legal action from the campaign group Greenpeace. As a result of the changes, it becomes easier for funds exposed to the fossil fuel industry to be designated as Article 8 or Article 9 compliant under the EU’s Sustainable Finance Disclosure Regulation (SFDR).

But if ESG funds can’t guarantee that money isn’t being used to finance the fossil fuel industry, how can environmentally-conscious investors looking to decarbonize their portfolios avoid investments that are exposed to these carbon-emitting sectors?

Thankfully, providers of regulatory technology (RegTech), often the very same companies that help financial institutions manage their compliance procedures, also have a set of tools that can be applied to the challenge of fossil fuel disclosure.

For investors and asset managers, the need to comply with legislation such as the SFDR has led to the development of innovative accounting frameworks and new data tools.

Building a detailed picture of the carbon emissions and fossil fuel exposure of complex financial instruments requires data that extends across both the financial data that RegTechs and rating agencies have always mobilized, as well as alternative datasets that have not traditionally been exploited.