The International Organization of Securities Organizations (IOSCO) issued a press release today stating that securities regulators from growth and emerging markets are seeking public feedback on proposed recommendations related to the development of sustainable finance in capital markets and the role of securities regulators in this area.
The question is – will the largest capital markets regulator in the world – the United States Securities and Exchange Commission support the disclosure of sustainability data by public companies and create guidance and suggestions of frameworks that can be used to assist US Investors. Approximately 1 in 5 investment dollars in the USA is going to sustainability finance but we are not hearing any action by the US SEC to support this capital markets efforts to provide better transparency and accountability. New technologies and innovations in the capital markets will be needed to address this global crisis – but we are not hearing anything on behalf of the world’s largest regulator on this topic. This also includes human capital data disclosure by companies including gender pay and pay ratio data including composition of boards of directors.
What the world’s other largest and emerging securities regulators are doing to support sustainability disclosures:
IOSCO´s Growth and Emerging Market Committee (GEMC) today published the consultation report Sustainable finance in emerging markets and the role of securities regulators, which proposes 11 recommendations for emerging market member jurisdictions to consider when issuing regulations or guidance regarding sustainable financial instruments.
Among other things, the recommendations propose requirements for disclosure of material Environmental, Social and Governance (ESG) specific risks, aimed at enhancing transparency.
The consultation report explores the trends and challenges that influence the development of sustainable finance in emerging capital markets. It also provides an overview of the initiatives that regulators, stock exchanges, policy makers and others key stakeholders in emerging markets have undertaken in this area.
The report identifies the pre-requisites for creating an ecosystem that facilitates sustainable finance, such as an appropriate regulatory framework and fit-for-purpose market infrastructure, reporting and disclosure requirements, governance and investor protection guidelines and mechanisms to address needs and requirements of institutional investors.
Given the global nature of sustainable instruments, the GEMC believes its recommendations will benefit both issuers and investors by improving the consistency of regulation of sustainable finance in emerging markets.
The proposed recommendations fall into the following categories:
- Integration by issuers and regulated entities of ESG-specific issues in their overall risk appetite and governance (Recommendation 1);
- ESG-specific disclosures and reporting (Recommendation 2);
- Data quality (Recommendation 3);
- Definition of sustainable instruments (Recommendation 4);
- Eligible projects and activities (Recommendations 5 to 9);
- Integration of ESG-specific issues into the investment analysis, strategies and overall governance of institutional investors (Recommendation 10); and
- Building capacity and expertise for ESG issues (Recommendation 11).
The IOSCO Growth and Emerging Markets Committee welcomes comments on the consultation report on or before 1 April 2019.
Use of XBRL for Sustainability Disclosures to Match Financial Data Disclosures to Support Machine-Readable Data Formats for Better Transparency and Accountability:
XBRL is a global standard developed to enhance transparency and accountability and this same standard can be used for other non-financial disclosures like ESG reporting.
The XBRL standard is supported by more than 600 organizational members worldwide and is freely available and are an important part of the fabric of reporting used in more than 70 countries around the world, in use by well over 100 regulators, and used by in excess of -- 10 million private and public companies globally for more effective transparency and accountability because the data is in a machine-readable data format. Why can’t the disclosure of non-financial data be in the same data format as financial disclosures and embrace this same global standard used in the capital markets to support better data transparency and accessibility of sustainability data?
Sixty percent of financial statement data is already being consumed electronically, and this figure will continue to grow, according to International Accounting Standards Board Chairman, Hans Hoogervorst. This same financial reporting standard used in the private sector can be leveraged over to the US municipal bond marketplace to create better transparency and accountability in this increasing complex marketplace to protect the public interest by making this data more accessible and in a machine-readable format for better data analytics.
Deloitte several years ago issued this video that describes the benefits of using XBRL for ESG reporting to help investors:
Deloitte Video on Importance the of Integrated Reporting by Public Companies to the Capital Markets:
Given the rising demand for sustainability performance data to support internal and external decision making in creating, growing and reporting value, the paper asserts that confidence in this type of information is strengthened by the application of the COSO ICIF, a robust and globally recognized framework designed to apply to both financial and non-financial information.
Former FASB Chairman Robert Herz, IMA (Institute of Management Accountants) President and CEO Jeff Thomson, and sustainability reporting expert Brad Monterio of Colcomgroup, today released a jointly authored thought paper, "Leveraging the COSO Internal Control – Integrated Framework (ICIF) to Improve Confidence in Sustainability Performance Data." These controls will be necessary as companies move forward with sustainability reporting and XBRL can be used on data that is disclosed to the capital markets to enhance data analytics and integrated reporting with the corporate financial data disclosed.
Meanwhile, hear more about what the Japanese Ministry of Environment is doing related to ESG disclosures in Japan based on Corporate XBRL filings at the upcoming DATA AMPLIFIED CONFERENCE in Dubai on November 13-15, 2018.
The MoE project is explicitly focussed on providing *long term investors* with insight into the ESG factors that provide opportunities and represent challenges for these firms. In turn, this promotes integrated thinking.
NAOMI SUGO Ministry of the Environment of Japan spoke on Environmental Information Disclosures with XBRL at the recent DATA AMPLIFIED CONFERENCE IN DUBAI in November 2018.
The Ministry of the Environment of Japan has promoted environmental conscious activities by companies through information disclosure, for example, by preparing guidelines for environmental reporting that includes using XBRL for better transparency and accountability.
Stay tuned as more and more securities regulators around the world mandate non-financial reporting and we better understand how this helps both companies and investors in a thriving capital markets to deal with the growing global crisis related to climate change and sustainability reporting to keep capital markets relevant in this growing area of climate finance and impact investing.
Management accountants can play a major role in helping governments, companies and investors better understand how sustainability reporting can help transform the capital markets and lead to a better world for future generations.