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Putting non-financials on equal footing

Just yesterday, the acting head of the Securities and Exchange Commission (SEC) Allison Herren Lee, announced a major refocusing of the SEC on ESG disclosure. In her speech at the Center for American Progress on Monday March 15th, she said that, “Investors are demanding more and better information on climate and ESG, and that demand is not being met by the current voluntary frameworks. Not all companies do or will disclose without a mandatory framework, raising the cost, or resulting in the misallocation, of capital. Investors also aren’t getting the benefits of comparability that would come with standardization….That’s why we have begun to take critical steps toward a comprehensive ESG disclosure framework aimed at producing the consistent, comparable, and reliable data that investors need.”

Increasingly the link between long-term financial performance and performance across a range of non-financial research including environmental, social and governance inputs is being recognized. Central to sound investment management and informed security selection is the need for increased quality and standardization of non-financial data.

While this data is evolving rapidly and has come a long way over the last several years, there is still much to be desired. A lot of the 'ESG' data that is available is immaterial to security selection -- awards, hopeful policies, employee volunteer hours, donations, non-science based net zero targets, etc. In other cases, there are rich data sets but they aren’t available to investors. For example, the U.S. Department of Labor requires companies with more than 100 employees to report detailed race/ethnic and gender employment statistics, but they are not required to publicly disclose the reports (but all the companies we hold do).

Within the non-financial (ESG) data set lies useful workforce and environmental data that sheds light on the long-term profitability of a company. Measures like pay equity, turnover, diversity, retention, recycling, toxic waste, water use, packaging waste, shipping, commuting, emissions, etc. are all data points that are as easy to standardize and audit as financials.

For this reason, the announcement last week from the Trustees of the IFRS Foundation that they will be continuing their work on the establishment of an international sustainability reporting framework is worth noting. It is the International Organization of Securities Commissions (IOSCO) along with the International Federation of Accountants (IFAC) who are calling for the creation of an International Sustainability Standards Board to sit alongside the International Accounting Standards Board (IASB) under the auspices of the IFRS Foundation.

And the big four accounting firms, Deloitte, EY, KPMG and PwC are working simultaneously with the World Economic Forum/International Business Council’s (IBC) Stakeholder Capitalism Metrics on publishing a set of universal metrics and disclosures for reporting on ESG performance. They are already auditing sustainability and integrated reports, so these new initiatives will help cement their roles as auditors of this data.

While these working groups and governing bodies work towards disclosure frameworks we can comfortably say that non-financial data belongs equally alongside the financials in audited regulatory documents, and that is where it will be in 5 years. There is no doubt that these standardizing initiatives will help investors and asset managers more efficiently allocate capital to those companies that are truly committed to sustainable growth.


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