Heating Up: the SEC Rules on Climate Disclosure

“What gets measured gets managed.” This quote by Peter Drucker also applies the other way around. Failing to measure corporate climate exposure and impact results in a lack of management, or even mismanagement in the face of climate risks and opportunities. Among the wide range of ESG topics that might be relevant information to investors, emissions can be seen as the ‘clearest’ data point to measure. Hence, it is emissions disclosure we must focus on to optimize our investment for positive (financial) impact, according to The Economist. Indeed, the recent Inflation Reduction Act in the US indicates a new momentum for the US pushing ahead on addressing climate change, with subsequent transition risks for companies.

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ESG has the ‘S’ Factor

Amidst all the media focus on climate and environmental concerns, it is easy to overlook another important facet in sustainability – the ‘S’ of ESG. Unlike the Environmental dimension, social impacts are often subjective, and identifying what to measure is a key first step in quantifying a firm’s social impact on the community in which they operate. While social indicators such as diversity ratios, presence of human and labour rights policies, and workplace accident rates have been used by ESG data providers to quantify a company’s social impact, many other possible indicators of a company’s impact on the community still pass by under our radar due to a lack of awareness or understanding about how they can impact society.

One such unknown aspect that can greatly impact society is design. The design of a physical or virtual object or space is traditionally viewed as simply the aesthetic inclination of the designer. However, the design of objects and spaces defines how we interact and engage with our daily lives. At its heart, design is as much a social tool as it is an aesthetic one, where design choices that does not account for disabilities for instance is discriminatory and can be a source of lawsuits. More importantly beyond legal risks, we must be conscious about how we design our society to not only ensure that everyone in our community can participate equally, with comfort and dignity, but also to guide individuals towards more sustainable decisions for themselves and for society.

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Machine Learning Models Don’t Work

*Without Good Design.

Machine learning (ML) is a branch of artificial intelligence that uses data and algorithms to imitate human behaviour (Brown, 2021). It is used in a variety of financial applications such as fraud detection, automatic trading, robo-advisors, loan underwriting, and targeted advertising. Machine learning revolutionizes how we invest, trade, advertise, and do business more broadly.

Machine learning also transforms how we conduct research and generate business insights. It offers unprecedented opportunities to use big data to identify patterns and extend our understanding of mechanisms. For example, creditors increasingly use ESG information to assess default risks. Currently, this assessment is predominantly of qualitative nature meaning that the analyst screens available material and incorporates the resulting impression into their assessment. Research involving machine learning could allow us to systematize the interrelations and generate tangible and actionable insights, including quantitative prediction of credit default probability.

A key question that arises upon this new opportunity is how to integrate machine learning in research design. Is it an add-on? Or a replacement? Or does using machine learning in research require a completely new way of designing studies altogether? This article discusses different ways to integrate machine learning into research design and their implication for knowledge generation and product creation. We use ESG and credit default as an illustrative case study. Specifically, we demonstrate the applicability of an ML-driven research design approach to determine the inter-relationships between ESG factors and credit default probability.

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Beyond The Acronym

Investors are eager to incorporate environmental, social, and governance – ESG – considerations in their investment strategies, even outside of what is explicitly framed as “sustainable investing”. In this blog, we explain how sustainability standards and frameworks are contributing to this trend; how they are ensuring a clearer rationale on sustainability in finance, and finally, where reporting guidance is headed towards.

The rise of sustainable investments has led to the burgeoning growth of sustainability standards, and frameworks for disclosure of investor critical ESG information. Among other things, Standards and Frameworks are helping companies and investors measure and disclose sustainability-related performance and make well-informed decisions while factoring in different emerging risks. In addition, they allow comparability over time, across sectors/industries, and in between peers or potentially with any company(s) operating anywhere in the world.

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Life in Plastic

The United Nations Environment Assembly (UNEA) met at the end of February 2022 to discuss the ongoing problems of chemical and plastic pollution. At this meeting, the environment ministers from 193 Nations agreed to establish an ambitious science-policy panel for global management of chemical waste and pollution and, for the first time, to forge a worldwide and legally binding treaty for tackling plastic pollution 1, 24. Work on this treaty, which will cover all stages of the plastic life cycle, is to begin this year, with a draft agreement to be completed by 20242.

Of course, chemical pollution is not purely caused by plastic production, with agriculture being one of the other leading contributors25. In fact, pollution from agrochemicals is one of the strongest factors linked to habitat collapse26. The new Value Alignment Tool (VAT) from ESG Book will allow investors to systematically screen over 29,000 companies on their revenues and business involvements from 7 overarching themes, with 36 different screens available. Within the Chemical theme, the VAT allows for the screening of assets involved in plastic, fertiliser, and pesticide production, tackling three of the leading causes of destructive chemical pollution.

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More Than A Buzzword

In 2021, we published the first report of its kind assessing not only the financial effects of corporate gender diversity but also its impact on transparency. Using ESG Book data, supported by academic and industry research, the ‘More Than A Buzzword’ report assessed the effects of gender diversity on global public corporations. In particular, it examined whether more diverse companies demonstrate greater non-financial transparency1.

With gender diversity continuing to grow in importance and prominence as a key issue in the workplace, this follow-up report assesses the progress that has recently been made on the topic, and expands on several trends highlighted in last year’s study. In this update, we look beyond gender diversity to also include in our analysis minority representation, the employment and representation of persons with disabilities and supplier diversity.

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ESG Soup

The expansion of the Environmental, Social and Governance (‘ESG’) landscape has led to the creation of frameworks and standards catering to a range of industry stakeholders. The increase in the number of frameworks and standards has resulted in the proliferation of ESG indicators, against which organisations can report their non-financial performance.

The heightened investor demand for ESG disclosures, new regulations, and a growing number of frameworks and standards creates challenges for organisations looking to disclose their sustainability metrics1 . ESG Book streamlines this process by providing a single platform housing commonly used frameworks and standards. To further simplify the disclosure experience, and reduce the reporting burden, a cross-framework mapping functionality will be available on the platform to support users with their disclosure journeys. Indicator mapping is an approach through which indicators can be matched by relevance to find commonalities across frameworks and standards, identifying indicators where relevant information can flow between questionnaires.

This blog post aims to introduce the new indicator mapping feature for quantitative metrics, both within and across frameworks, which will be made available on ESG Book and discuss the ways in which mappings can be used to generate value for users.

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