The Status Quo is Unstructured
Structuring data does not happen in a vacuum. Across a global landscape of competing reporting frameworks, unique localities exist with their history and norms. These overlapping frameworks are the context in which new regulations' promotion becomes industry-positive.
The status quo Environmental Social Governance (ESG) investor opinion on regulation may differ slightly from standard market opinions. The CFA Institute recently reaffirmed its position on ESG integration in a statement where they maintain, "CFA Institute does not believe that ESG integration should be mandated by any regulatory authority, but rather that policy and regulation should leave things open for asset managers to determine for themselves and their client the method of ESG integration that works for them."
Disclosure Standards Are Key. Investors are looking for a much more consistent and coordinated effort around corporate ESG/sustainability reporting frameworks. CFA supports the efforts of organizations like the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-Related Financial Disclosures (TCFD) for focusing on disclosure and engagement standards around material ESG metrics. We are also encouraged by the recent moves by the International Financial Reporting Standards (IFRS) Foundation to wade into the debate on creating sustainability related accounting standards. CFA Institute, January 2021
Suppose we added another letter to ESG investing? The addition of an "S" to stand for Structured Environmental Social Governance, or (S)ESG. Despite resisting mandatory ESG integration, the CFA Institute does offer support for "a much more consistent and coordinated effort around corporate ESG/sustainability reporting frameworks," which is a prerequisite to their vision of an efficient ESG marketplace. This nuanced viewpoint is when idaciti and XBRL enter the picture.
It's Greener South of the Border - Mexico Leads the US
We recently learned a story about XBRL rollout in Mexico that resonated with the idaciti team. Mexico has a history of being ahead of the United States on ESG initiatives.
Accountability has become a hot topic in the Mexican ESG sector, with all stakeholders seeking to make companies accountable for the environmental, social and economic consequences of their activities. ICLG, December 2020
This is a feeling which the American public and investing community are beginning to share. However, as we learned, Mexican companies did not complain when ESG regulations tied to XBRL reporting became mandatory. As seen in the CFA blog above, the US market typically feels the opposite about government-imposed regulations. Won't the free market solve the issue on its own? The key difference comes down to context and nuance.
Structural Benefits for (S)ESG
First, new regulations are not imposed "tabula-rasa." There were already dozens of reporting requirements that large Mexican companies need to comply with as they competed to show their sustainability credentials. The standard ESF reporting taxonomy incorporated stakeholder surveys to consolidate and reduce overlap, actually saving companies time and money.
Second, there is an added benefit of transparency. Companies comply with the taxonomy themselves because it offers standardized non-financial metrics for ESG data reporting. There isn't a need for ESG rating providers and their history of criticism on issues like divergence and non-materiality.
Third, modern investors love structure. So does the incoming Biden administration.
The Securities and Exchange Commission could put into place guidelines on the federal monitoring of environmental, social, and governance issues as a Biden administration places greater focus on the climate change agenda. ETF Database/ESG Channel, January 2021
The structured format of ESG Data provided by XBRL would allow for globally applicable comparison points. Machine-readable data powers machine learning and new passive ETF strategies. With increased access to new markets, customized ESG solutions are now possible.
Join Us for an ESG Webinar on 1/25 - Stay in the Loop, Watch this Space
The future promises of a seamless ESG investing relying on multi-dimensional data to enhance impact investments. Data solutions that offer ESG "analytics" from a third-party ratings provider are quickly going out of style. Why? They don't scale well; they often conflict, they are the interpretations of the data provider.
Next week, in conjunction with FEI and Toppan Merrill, idaciti's CEO Emily Huang will give a presentation alongside Wes Bricker , the vice-chair of PwC to discuss these topics. Emily will demo ESG Scorecard based on disclosures that are already filed with the SEC that comply with the REG-SK requirements.
You can register for this investor-focused event here.
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