The rise of ESG and the impact on the trade lifecycle

Using a reverse engineering approach, we seek to map the impact of the rise of ESG products along the trade lifecycle and the functional architecture of financial institutions. We find that ESG does not change the trade lifecycle per se, but shifts the focus to the pre-trade phase due to regulatory and risk considerations, disclosure and verification of KPIs, as well as data management requirements. As a result, ESG provides an impetus to improve front office performance, integrate sustainability risk into risk management, and credibly redirect capital flows to sustainable investments. ESG is thus a lever for synchronizing front to back office systems, particularly with respect to ESG-related client data gathering, rating tools, and downstream systems. Our analysis of the functional architecture shows a marginal impact on the throughput-relevant functions, however, the enrichment of different data models has to be ensured from the beginning in order to effectively serve the output-relevant functions, especially with regard to ESG-relevant functions like reporting.