This is an excerpt from Finextra’s report, 'The Future of ESGTech 2023'.

The collective, global will to enact standards for ESG reporting has never been stronger. Following the UN Climate Change Conference (COP26) in November of 2021, the International Financial Standards Reporting (ISFR) Foundation created the International Sustainability Standards Board (ISSB) with the goal of delivering a “comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities to help them make informed decisions.” This is an important goal, but it does not go far enough.

To adequately address issues like climate disclosure, ethical investing, greenwashing and financial inclusion, standardisation for ESG reporting must extend beyond disclosure criteria and begin with the identification of businesses engaged in ESG reporting. Without a clear, standardised and global entity identification system, ESG reports lose value due to the challenging nature of evaluating performance indicators across different reporting regimes or jurisdictions.

For instance, consider how a Danish investor’s plans to invest in a Swedish fashion company might change if the company’s Indian subsidiaries do not consider supplier risks. If this particular investor cannot access the relationship information on the company HQ and its subsidiaries through a single data source—ideally in an easily consumable and machine-readable format—how can the investor move forward with confidence? Financial institutions face a similar set of challenges. If a Swedish fashion company applies for a sustainability-linked loan, how can the financial institution analyse the entity’s eligibility for this type of funding and determine its ESG risk assessment in a straightforward and transparent way?

Innumerable national and regional standards for entity identification exist around the world, with different identifiers serving national needs. These systems are fragmented, though, and their utility breaks down when companies perform due diligence checks that require reconciling ESG data across geographical borders.

The Legal Entity Identifier (LEI) addresses this challenge, providing a standardised system for finding, comparing and consuming ESG data globally. An LEI is a unique 20-character code created for a legal entity that provides complete legal entity clarity and removes doubt about who is who and who owns whom. Because LEIs use a global standard, they set a foundational identity that legal entities worldwide can recognise, agree with, and trust. Administered by the Global Legal Entity Identifier Foundation (GLEIF), the LEI links to competent national business registers, making it much simpler and faster for data consumers to bring data assets together.

This is particularly true for aggregated data coming from third-party sources. If they carry the LEI on top of their proprietary identifiers, public and private sector data consumers can achieve a higher level of trust in the rightfulness of data and its correct allocation.

By tagging entities with the LEI and using it as a data connector in ESG reporting, transparency can be increased for the reporting entity, its related companies, and even to suppliers of a particular firm. This facilitates comparability of ESG data exchange. This level of comparability becomes especially important as new regulations require asset managers to create entity-level reports documenting how climate-related matters are accounted for when managing investments for clients.

Already, a number of global organisations are leading the charge to incorporate the LEI into their efforts for positive change.

Consider the following initiatives that successfully use the LEI to improve ESG-related processes:

• A project by OS-Climate incorporates LEI datasets made available in the Amazon Sustainability Data Initiative (ASDI) in order to drive broader and faster development of climate-aligned financial applications. By storing climate-related datasets in the cloud, the initiative accelerates innovation by minimising the cost and time required to acquire and analyse these very large—an often inaccessible—datasets. Furthermore, by hosting the LEI data on AWS and creating a direct connection between GLEIF’s servers and the AWS S3 bucket, the initiative provides LEI updates every eight hours, making this piece of information available to anyone around the world in a timely manner.
• The Sustainability Accounting Standards Board (SASB) recommended the use of the LEI in non-financial reporting in Europe in its XBRL Taxonomy. The recommendation applies to companies which have reporting obligations under the ESEF reporting guidelines and recognises the unique role of the LEI as a global and digital entity identification solution for ESG reporting. When the LEI is extended to non-financial reporting, location of firms and supply chains can be collected through publicly available Global LEI Repository at a very granular and transparent manner, which is crucial for assessing physical and transition risks.
• The LEI was included in the Greening the Financial System’s (NGFS) progress report on bridging data gaps for linking financial and non-financial information. The report, published in May 2021, suggests that investors can use the LEI as a data connector to mapped identifiers such as Business Identification Code (BIC) and International Securities Identification Number (ISIN) and for linking financial and non-financial information.

The LEI is assigned to a legal entity by a GLEIF accredited LEI Issuer. The reference data describing the legal entity is investigated and verified via the local registration authority upon the point of input by teams of experts. Regulation specialists, combined with additional third-party checks and balances, guarantee the accuracy of GLEIF's data bank. And since the LEI and all associated reference data is free for all to access, anyone anywhere can determine if a private or public organisation is who it claims to be. Accessing and being confident in the authenticity of this information allows legal entities to fully trust each other, safeguarding all sorts of ESG investment and trade decisions.

For ESG reporting to have its intended impact, data collection must start with holistic and standardised entity identification. This is foundational for creating transparency at the entity level, without which it is impossible to achieve the timeliness, accuracy and reliability required for meaningful ESG reports