Volatility Precedes Standardization

The financial services ecosystem is experiencing innovation at breakneck speed, as can be seen within the walls of fintech-heavy startup incubators such as TechQuartier. Regulations – PSD2 and MiFID II for instance – from the topside constrain the direction of innovation, usually with consumer protection as the driving force. However, a third force is equally in play: standards. Standards are independent from regulations, in that “regulations stem primarily from a top-down approach, while formal standards are typically the result of a market-driven process (Büthe and Mattli, 2011)”1.

Ecosystems are groups of interacting firms, where interaction is largely of collaborative and/or interdependent natures2. The standards of interaction especially in digital ecosystems are critical: APIs must be able to interact, programming languages must be mutually intelligible, the data that certain services rely on to provide value must be created and packaged in workable ways, and so forth. A lack of adherence to these standards would mean, for instance, that the smartphone in your pocket that you use for mobile banking, equities trading, and payment processing would figuratively fall apart.

However, standards, especially in uncertain environments, take time to formulate. During this process, multiple parties might attempt to control the outcome of standardization, likely in their and their stakeholders’ interests. As Dr. Philipp Tuertscher commented in a recent FINDER meeting, standards are fairly mundane once enacted, but their formation is highly political and an interesting phenomenon to observe.

An easy opportunity to watch this process is in the standardization of corporate ESG data reporting for investors. In the financial services ecosystem, this is a huge step ahead of MiFID II’s full implementation. In this essay, we’ll briefly cover these terms and discuss what’s happened thus far, which will set a baseline for a future series of essays covering key events, lessons learned, and theoretical takeaways from data collection during the ESG data standards-setting process.

ESG Data

ESG stands for environmental, social, and governance. This category of data has experienced a proliferation of importance alongside corporate social responsibility, or CSR, initiatives. The three subcategories of data, when considering a company, cover aspects such as gender wage gaps, environmental waste protocols, and anti-corruption protections.

Until recently, the disclosure of ESG data has been generally voluntary, with some exceptions. As such, industrialized ESG data production itself has not been a heavily regimented practice, so it’s largely been the efforts of NGOs, watchdog groups, investor discretion, and so forth that have pushed companies to publish ESG data. Since ESG data has not been directly monetizable (a familiar trait of all so-called “alternative data,” a category to which ESG has historically been ascribed),

However, self-generated reports of CSR performance are riddled with inconsistencies and gaps for obvious reasons. To address this, agencies and companies such as MSCI and Sustainalytics began publishing independent ESG ratings on mostly publicly listed companies, and over time, this practice has gained enough importance with institutional investors and asset managers such that there are even ecosystems of sustainability ratings agencies, most of which having their own unique methodologies and outputs.

While the proliferation of ESG reporting is generally good, there are obvious problems. Asset managers on the hunt for comprehensive data regarding a given publicly listed firm’s CSR performance are confronted with a blurry landscape of reporting and rating methodologies. Even as the agencies consolidate over time, the lack of industry-wide standards in ESG data reporting has asset managers significantly concerned over the loss of reporting and rating quality.3

Regulations & Standards

No classification system currently exists at EU level which clarifies what constitutes an environmentally-sustainable economic activity. Market-led initiatives that have emerged in recent years are not comprehensive enough and do not sufficiently reflect all EU environmental sustainability priorities.” – European Commission

The European Commission has introduced MiFID II, a sustainability-incorporating revision of the original Markets in Financial Instruments Directive from earlier this century, and a battery of sustainable finance directives installing, among other things, a taxonomy of sustainable economic activity. This combination pushes asset managers and institutional investors to bring ESG data closer to the core of their and their clients’ financial decision-making and affairs.

The benefits of a clear and concise data reporting methodology, which is only one of the foci of this push, are clear. It takes the burden of figuring out what important metrics are off of asset managers and institutional investors, it allows companies all along a value chain to assess each other and exclude any proverbial bad apples, which in turn gives the end consumer the ability to knowledgeably avoid below-threshold products and services.

However, as these initiatives come from a regulating body, they’re a bit top-down, and therefore the problem of standardization remains: who is in control? Who gains from the way this will eventually pan out? Who loses? These are just a few of the vivid questions that we ask as this process wears on.

Through interviews, participant observation, and content analysis, interesting angles of the standardization process will become apparent. We hope that these will have theoretical implications that go beyond sustainable finance, so please follow the FINDER blog and feel free to weigh in with your own insights – all perspectives are welcome. I can be reached for questions and comments at s.ellis@fm.ru.nl.

S. James Ellis, ESR


  1. Blind, K., Petersen, S. S., & Riillo, C. A. F. (2017). The impact of standards and regulation on innovation in uncertain markets. Research Policy, 46(1), 249–264. https://doi.org/10.1016/j.respol.2016.11.003
  2. Jacobides, M. G., Cennamo, C., & Gawer, A. (2018). Towards a theory of ecosystems. Strategic Management Journal, 39(8), 2255–2276. https://doi.org/10.1002/smj.2904
  3. Avetisyan, E., & Hockerts, K. (2017). The Consolidation of the ESG Rating Industry as an Enactment of Institutional Retrogression. Business Strategy and the Environment, 26(3), 316–330. https://doi.org/10.1002/bse.1919