There is a lot of confusion about how to implement climate as well as environmental, social and governance, or ESG, analysis in finance. Today, ratings agencies, researchers and fund managers use different, often proprietary models to assess companies’ ESG performance. That makes it difficult to compare one company to another, and leaves room for greenwashing.
It also holds back a full throttled re-pricing of social and environmental-related risks and opportunities.
Climate risk analysis should not be an “investment edge,” but a “public good.” Global warming is already causing more frequent extreme weather events, and scientists warn that we are headed for far worse without a dramatic course correction.
So here’s an idea: let’s make climate and ESG data open to everyone.
Market failures in finance have traditionally been mitigated through transparency. But instead of seeking transparency from just the companies (aka issuers), as is the focus now, let’s seek transparency from all the large players that drive the markets and share it equally so that everyone can use it.
I call this ‘Full Market Disclosure.’ It turns an “investment edge” into “public goods” for everyone.
Full Market Disclosure would be implemented by large fund managers disclosing their entire climate and ESG analysis for each investment transaction (like a 13F filing, but daily). Large brokers would do the same when they publish research, and major sustainable ratings agencies and ESG data providers would make their rationale available to individual investors and small organizations (guaranteeing that the public and every innovator can participate).
Climate financial risk disclosure (ESG could be used interchangeably for climate, but for simplicity’s sake, I’m just using climate here) will work if there is a market with tens of thousands of incentivized, competent professionals competing to publish detailed analyses daily on climate risk. This can be achieved through a “Big Bang” that compels major participants to simultaneously disclose on climate, creating an active “free market” to price climate risk.
As I wrote in two letters responding to the Securities & Exchange Commission’s call for comment on climate financial risk, entitled “Full Market Disclosure of Climate Financial Risks,” and “Linux ESG: The Logical Next Step for Markets and Regulators,” we need to first, make sustainability ratings and ESG data free of cost for individual investors and small organizations, and second, require registered investment advisors and broker dealers with client assets over $1 billion to disclose their entire climate research process for each transaction and report.
Full Market Disclosure means that everyone at the table plays their climate cards face up to have the best read on climate risks. The benefit to large fund managers, brokers, and raters from all this openness is their complete view of climate risks, which helps the bottom line. Moreover, markets will quickly improve by iterating in a radically transparent way – as loads of new information is released daily, the innovation will be unrelenting, reducing risk.
Mark Carney, former Governor of the Bank of England and UN special envoy on climate action and finance, recently said, “The plumbing of the financial system has to be put in place so that financial institutions – whether they’re banks or pension funds or insurers or asset managers – have the information, the tools and the market to take climate change into account. So, in other words, it’s a fundamental driver of every investment decision or lending decision.”
Full Market Disclosure is a concrete innovation that ensures climate becomes a part of every investment decision as rapidly and openly as possible, creating climate (and ESG) price discovery for the first time.
There’s an app for that
Standards like the Task Force on Climate-related Financial Disclosure (TCFD), Sustainability Accounting Standards Board (SASB), U.N. Principles for Responsible Investment (UNPRI), etc. would become applications that the Full Market Disclosure environment automatically tests and refines. Full Market Disclosure is a funnel that can efficiently process all of these competing applications. The more, the better!
They won’t be debated or promulgated – they’d be organically ratified by use in real world investing, self-evident over time.
Full Market Disclosure will shine when climate journalism hums loudly, processing all the information that comes out daily, making greenwashing next to impossible, and unlocking a tsunami of effectively invested green finance.
A New Path
Sustainable investment professionals understand that there is no time to waste as the climate is dangerously changing, so it makes sense to be 100% transparent in their work now, while we have a chance to solve the problem. To find what works, all climate ratings and data should be disaggregated on a Creative Commons “BY” license so that everyone can see and use everyone else’s ratings and data.
Asset owners should require that they, their fund managers, and their brokers be totally climate-transparent in real-time and pay up for climate ratings and data so it’s ubiquitous. Issuers like public and private companies, municipalities, etc. should publish primary data in real-time. Issuers should study investors’ climate analysis to provide better data.
Public disclosure about how everyone is pricing climate risks will effectively crowdsource a clear picture of how to price climate over time. Disagreement is a good thing, and everyone should publish several versions of analysis, data, etc. to air all possible solutions and get feedback.
The goal is to learn quickly, so everyone should immediately publish analyses of their climate mistakes, with updates based on lessons learned. Participants will swarm around topics, as they do now, refining insights. Openness and speed bring success.
Full Market Disclosure leadership will naturally gravitate to the bravely honest as they will generate the most learning.
SEC Chair Gary Gensler may be the forward-thinking leader to implement Full Market Disclosure. In prepared remarks before the European Parliament last September, he stated: “Many funds these days brand themselves as “green,” “sustainable,” “low-carbon,” and so on. I’ve directed staff to review current practices and consider recommendations about whether fund managers should disclose the criteria and underlying data they use to market themselves as such.”
Where the SEC goes, so goes the world. The U.S. represents roughly half of equity allocations by global investors; if the SEC adopts an open data policy, then all foreign fund managers operating in the US will have to make these disclosures, too. Local regulators would likely adopt such disclosure mandates across the world since their fund managers are already doing the work for the U.S. For the first time, we would have solid, granular measures of global climate market risks.
Full Market Disclosure is a market-based capitalist process. So, if governments can’t help, then the Net-Zero Asset Owners Alliance and Climate Action 100+ can start a revolution themselves by adopting Full Market Disclosure. The flood of climate data would generate a center of pricing gravity that will pull all financial transactions into its orbit and reshape the way everyone sees the world, right down to the way that we price each individual transaction based on solid fresh information. As fiduciaries, asset owners never lose by demanding transparency from their service providers.
Full Market Disclosure will be irreversible once unleashed.
- Fund managers and brokers will be ranked on investment performance and Full Market Disclosure leadership.
- Journalists will cover the daily troves of disclosures.
- Full Market Disclosure analytics on Bloomberg, Refinitiv, and others will generate clear, unique pictures of risk and opportunity.
The new reality Full Market Disclosure illuminates would generate profound structural price adjustments – a great repricing – that creates an investment activity overnight called sustainability arbitrage or “susarb” for short. Investors afraid of missing out on the shift will pour in, quickly assimilating Full Market Disclosure and “susarb” across markets. Susarbs will scour the world for mispricings and new developments.
Even companies in markets with highly restrictive media and governments, like China and Russia, would see their securities prices shift when foreign investors use comparable Full Market Disclosure data. Locals will import this pricing and add their expertise for a tighter susarb that will further change the way markets in closed societies are priced. Sustainability arbitrage will bind the world together into a constructive shared reality.
The first large, reputable firm that does a solid job on brokerage and fund management in climate and adopts Full Market Disclosure will likely become the leader in ESG and climate finance.
Smart, young people across the world would gravitate to this bold organization. Clients would applaud the move as it once and for all ends any question of greenwashing. Regulators would quickly recognize and promulgate that Full Market Disclosure is the core standard to follow, as all other standards and data regimes can rest on top of it.
Financial organizations around the world would have no choice but to quickly copy this firm and adopt the Full Market Disclosure standard as clients and young staff will demand it and regulators will eventually require it. The vast quantities of data and learning would reframe the world’s understanding of climate and ESG risk and greatly facilitate the transition to a sustainable future.
The secret to making money from climate finance, then, is not to try to make money from it initially. The first firm that does this well stands to become the leader in climate and ESG finance. I am curious to see who does this!
Gregory C. Beier is the Macro ESG Strategist and Founder of Sustainability Arbitrage LLC, where he analyzes markets, politics, and technology for a sustainable future to generate global risk insight for institutional investors.