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ESG Outlook: SEC Mandates and the Future of ESG Disclosures

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Author: Nate Wyne (CEO)

I’ve always been drawn to colossal stories with unforeseen endings. One of the first ones for me was Frank Herbert’s Dune.  I discovered Dune in college when a combination of low funds, national political deadlock, and a dearth of humanities homework made me particularly susceptible to Herbert’s brand of fantasy. What really got me in Dune was the use of planets as metaphors of their respective societies. There were characters who felt violently passionate about maintaining their planet’s social order–and others who dreamed and worked towards massive, planet-scale ecological changes that would direct every facet of their planets development.

Working with massive ESG data at Floodlight gave me an appreciation for how companies fall into one of these two camps: the change resistors and the passionate visionaries. Some companies see the changes our planet is undergoing as part of the natural course of business and the idea of keeping Earth in a kind of temperature-focused homeostasis is not only impossible but distracting from the key issues that can affect humans. Other companies adopt mission statements, make commitments, and drive real-world changes to curtail or even stop taboo activities such as fracking or ethically questionable supply chains in a bid to market their own brands as much as to commit to a specific set of material changes. 

The challenge of understanding which companies have a passion for change, and which ones focus solely on how to spin the reality has been insurmountable for many years. In Dune, the challenge is a monopoly on “spice”, an element only found on one planet, and necessary for all interstellar travel. In our reality – the Friedman doctrine tends to leave a significant asterisk on any behavior not focused on corporate profit. Because companies often take a forgiveness vs. permission approach in its corporate actions, or did not, disclose investors often had to just hope that what they believed to be happening at the company level was true. One step further, since the penalties for obfuscating were non-existent, there was little incentive to change.

No longer. Just as in Dune when all seems lost, new characters and powers emerge to challenge, not just the status quo, but also the future direction of the entire planet. Of course, the metaphor is not perfect. In Dune the finale moves towards a dictatorship forming to respect both indigenous rights and tighter controls on the scarcest commodity in the universe. On our planet, most dictatorships kneecap themselves by choosing a system that liberal democracies hold in contempt, but often trade with them anyway because their restive populations of voters have grown accustomed to a life of leisure.  

International cooperation on Russian sanctions is proving a powerful lever in removing the economic advantages that non-dictatorships can and should provide.  

Since the SEC was founded in the wake of the economic and social devastation that arrived with the Great Depression, the notion that more disclosure around key corporate behaviors has really taken hold with today’s investors. To wit, ESG and Sustainability-themed investments are seeing record inflows. Investors are getting wise to the quaint illusory practice of “business as usual” in their operations – and buy more shady carbon offsets as a way of signaling, “see, we’re just as committed to life on this planet as the next company – don’t sell your stock in us – in fact, buy more!”  I believe that these sophomoric attempts at sustainability will be reviled in the not-too-distant future.  In much the same way the new force arrived on the spice planet in Dune, companies across the board will need to take harder looks at what is happening “on the ground” in order to maintain or grow their positions in their markets.  

The saving grace of ESG is that it is not actually bound by one value system or framework.  For decades most people have thought of investing in a non-Friedman as an emblem of one political ideology.  As ESG has progressed, asset owners with views on more than just oil, and diversity, they look to have their money build up companies based on how they treat their employees, what countries their supply chain stretches to, and what their record on cyber security has been.  None of this is surprising to those who watch the way technology interacts with intelligence.  The way we use A.I. to understand and ease the process of applying key values to investments would have taken hours and hours before – and thereby been only accessible by the wealthiest asset owners in the world.  With our technology and partnerships, we are reinventing the financial world in a way that truly empowers investors to let their money build the world they want to live in.  The economic fence being built around Russia as a consequence of its anachronistic invasion of its neighbor is only a preview of the power beginning to manifest itself in the markets.

Dune answers the question of a better future, only after hundreds of pages of progress and reversals for the key characters in the story.  While it’s wrong to try to paint the evolution of investing in a good vs. evil context, the enablement of asset owners to push their money into values they believe in smacks of the same logic.  While most of Europe, Japan, and Australia has already acted to more properly harness ESG directed funds in their markets, we in the US are still in early innings on this side of the Atlantic, and the game has barely started in most of Asia.  

Changing the only planet is easier for Hollywood to show than for us to do.  While we at Floodlight and ESG Analytics are obviously in the passionate changers camp, our data works for the skeptics too.  It’s our hope that the new rules and practices in the industry put a better foundation underneath every data-driven investment decision.  

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