Monday, September 21, 2020

Brief Reflections on the OMFIF/Refinitv Report: The Role of Data in Sustainable Investment, Policy and Regulation (2020)

"Everybody wants comparable reliable, robust data, but no one quite knows how to get it, and people are very scared about the implications of what having that much data might mean on a societal level.’" (quoting Felicia Jackson in Report, below at p. 29)
The creeping triumph of compliance oriented accountability based data driven governance continues  unabated.  It is now high on the horizon of central banks and their macro economic planning related to non traditional risk--especially pandemics, and sustainability, including climate change related risk. To that end, central banks are increasingly sensitive to the need to manage macro-economic risk through data driven mechanisms.  Yet the management of that risk is increasingly challenged--at least for the banks--in a world in which data is incoherently harvested, warehoused, siloed, and used.  That is one of the fundamental insights of a report recently released by the Official Monetary and Financial Institutions Forum (OMFIF) and Refinitiv: Danae Kyriakopoulou (Chief Economist and Director of Research, OMFIF), Brandon Chye (Economist, OMFIF), Julia Walker (Global Head of Government and Industry Affairs, Sustainable Finance and Risk, Refinitiv), with support from Sherry Madera (Chief Industry and Government Affairs Officer, Refinitiv),  The Role of Data in Sustainable Investment, Policy and Regulation (2020)
The move towards sustainability is accelerating even as the global economy grapples with the consequences of Covid-19, an OMFIF-Refinitiv report shows. . . . Socioeconomic resilience in the face of risks such as the pandemic and climate change is moving to the forefront of agendas across the financial sector. Stakeholders are unanimous in the belief that clear and consistent environmental, social and governance data will be critical to realign the financial markets towards sustainable development and help achieve the sustainable development goals. While there has been significant progress in disclosure of information in relation to environmental and societal impacts over the past decade, this field is still young with unrealised potential. (Press Release)
But there is more.  Central banks do not want necessarily to bear the burdens of data harvesting (as important as that might be for creating the normative foundations for conduct to be managed).  Instead, the banks appear to envision a role like a sort of Google or Facebook--as a platform through which such information may be aggregated, dispersed, controlled, and directed.  
More than that, of course, central banks as information platforms would then serve potentially to shift the center of the regulatory power of data driven governance systems from data collectors (enterprises, NGOs, governments, financial institutions, and private information platforms)  to the central banks.  In effect, it could be surmised, the object of centralizing data aggregation through a bank platform, would be to shift the power to organize and direct that data gathering from its sources to the banks themselves. That is real power. 
The Report is an especially important read, if only for indicating the way in which the move toward data driven government--and its politics--is becoming a central objective of politics, and from politics, to the animating form of behavior control.  That control is increasingly oiled not by jurisprudence and its law, administrative regulations, and judges, but by markets, data, risk and expectations of key actors that in the aggregate constitute the great driers of economic, social, cultural, and political life. The Report may be accessed (pdf) HERE.
Brief reflections keyed to some of the more interesting aspects of the Report follow. 
1. The interaction of public and private actors within a data platform for non financial data was nicely visualized in the Report pp. 22.
Note here the central role of both enterprises and non state actors.  But note as well that in this data universe the roles of both are transformed from guiding the shaping of the production of data and its alignment to underlying conduct to be stressed, to one in which the role of both is essentially non-discretionary and ministerial--that is the Report envisions the movement of data driving from enterprises and non state actors to others.  As a consequence enterprises and NGOs are likely to become the blue collar workers of transnational data industries.  They serve themselves, to be sure, but increasing they serve other masters first.

2. The role of central banks as platform was nicely summarized in the Report's Key Findings (pp. 7-8):

THE ROLE OF CENTRAL BANKS IN THE SUSTAINABLE DATA ECOSYSTEM• Central banks are critical stakeholders in the success of a sustainable financial system as both supervisors and reserve managers. • Controversy over policy creep is receding as central banks converge over climate change as a long-term risk to their macroeconomic responsibilities.• Capacity-building between central bank networks such as the NGFS and other public investors is needed to accelerate the global pivot to sustainable regulation. • While international platforms are building technical expertise among the community of banks and supervisors, there are also risks of regulatory arbitrage in ESG.• Conflicting views over materiality exist in the areas of regulatory approach (principles vs. rules-based) and intention (stakeholder vs. financial orientation).• Central banks must play a role in designing feedback processes for understanding materiality and data standards to promote consistency of reporting and benchmarking.
ESTABLISHMENT AND DIFFUSION OF GREEN TAXONOMIES• Sustainable Taxonomies are a growing tool for green supervision - but globally agreed taxonomies do not currently exist.• Many see the EU Sustainable Taxonomy as best practice, serving as an important ‘first-mover’ framework that will inform similar initiatives in developing markets. • Europe and Asia-based financial regulators lead in taxonomy development.
MOVING BEYOND DISCLOSURES TO FILL DATA GA P S• In the absence of mandatory regulation or stringent monitoring, self-reported ESG data and disclosures may lack sufficient detail: this is a matter of regulatory concern if the true level of risk faced by companies is obscured. • Regulatory perspectives are mixed on whether to adapt ESG benchmarks and regulatory requirements to local economic contexts or to maintain a consistent international standard.• Disclosures are not a panacea for ESG data gaps. In the absence of robust regulation to improve consistency, coverage and third-party verification, there is a risk companies will engage in greenwashing. • Covid-19 will highlight other ESG risks and increase focus on data requirements. There is a need for a broad picture of ESG risks and opportunities and the datasets required.
DATA REQUIREMENTS FOR SUPERVISION• Regulators see increased dialogue between users and data-providers as a pathway to better quality data and decision making.• Climate issues have highlighted technical gaps in the practical usage of non-financial data • Binary data on climate risks impose limitations in applying these data to financial and macroeconomic modelling.• Forward-looking data are required alongside retrospective disclosure data since the magnitude of systemic risks remains uncertain.• Multi-disciplinary talent within organisations is required for financial institutions and supervisors to evaluate and use different ESG datasets. A shortage of talent in this area is a global risk.• Advanced data analytics and innovation can only be useful if built on fundamental, robust and trustworthy raw data sets.• A repository of comparable financial and non-financial ESG information – raw, but standardised - is seen as an important next step.
PROMISE AND LIMITATIONS OF NEW TECHNOLOGIES• Technologies such as cloud computing, drone and satellite imagery and machine learning are increasing capabilities in data collection and analytics.• Combining spatial data with other existing datasets could enable more intuitive and easily accessible use of these data by general financial professionals.• Granular tracking through technology has improved, but regulators and investors struggle to determine precise attribution e.g. via Scope 3 emissions along global value chains.• Risk of ESG benchmark biases through gaps in data coverage filled by estimates in both mature and emerging markets.
NEED TO THINK BEYOND CLIMATE CHANGE• Investors are conscious of tailoring data needs to specific asset classes and their risk assessments.• New data demands are emerging in the wake of the Covid-19 pandemic; regulatory and industry emphasis has rebalanced away from principally environmental issues to a more holistic focus across the three ESG pillars. • Data measuring companies’ risk management systems and governance structures will be increasingly demanded to assess financial performance and business resilience.• The integration of other environmental metrics such as biodiversity, chemical pollution, ocean sustainability and water will require more varied, frequent and extensive data collection and technical expertise.• Data on biodiversity loss and nature-based solutions are set to become a new frontier for climate-conscious regulators and investors and will be a critical support for the Task Force for Nature-related Financial Disclosures as it coalesces.

Gone, of course, is what had been the dominant discourse of powerful NGOs and others that had posed a significant challenge to the realization of the UN Guiding Principles for Business and Human Rights--the guiding premise that human rights (and with it human rights impacting sustainability and climate change) were neither measurable nor should they be because each was absolute and uncompromising.  To measure is to suggest--unacceptable--that one can balance or weigh each against the other.  The old jurisprudential discourse started from the premise of no waiver and no compromise.  The result was an insistence on narrative reporting and absolute rules based on prevention-mitigation-and remedial strategies.  In its place, the Report suggests without making it explicit, is a guiding premise that human rights and every other principle of human rights and sustainability. All rights, like rights in property, may be measured--that s may be compared and thus compared valued against each other.  That fundamental premise of universal valuation then moves us from a jurisprudential to a markets based discourse. But such a discourse is not in need of law or regulation (those merely provide the basis from which value can be surmised--as calculated against societal desires and moral baselines). Instead it is in need of data--that that can be compared and that ca be extracted from all sources in ways that make them useful in ordering individual behavior and collective standards.

3.  The importance of data standardization was a key element, the consideration of which is worth considering carefully (Report pp. 14-15).

STREAMLINING DATA STANDARDS FOR COLLECTION AND USE. Historically, the lack of regulatory focus on non-financial data has led to the intrinsic lack of non-financial data in the larger ecosystem. As demand for non-financial data has soared, some market respondents have responded by catering to this demand and creating questionnaires that they ask a company directly. Some ESG ratings are constructed with such information as a base to help companies understand ESG risk and opportunity. Some providers, like Refinitiv, take in raw publicly available data, standardise and aggregate them to allow for direct comparability and provide a score to help with guidance. As the financial industry has matured in ESG expertise, private-sector participants are increasingly keen to access and use raw data points. Crystal Wan, director at Blackrock’s Official Institutions Group said ‘What we find is that using the raw data, the disclosures from companies, is almost more useful sometimes, than just taking the face value of any one rating, or any one score that is provided in the ready-wrapped fo r m a t ’.

When establishing data requirements, it is important to consider the long-term effects from systemic sustainability risks, and the fast-changing nature of technologies and businesses. For instance, Isabelle Mateos y Lago acknowledged the inherent difficulties in quantifying existential climate risks. ‘At the end of the day, you can't reduce everything to data. But ultimately what we're dealing with here is a shift, especially with climate. It is very different from most of the risks out there. We know that it is going to happen, what we don't know is exactly at what speed or the great deal of impact it will have.’

In some cases, the top-down approach may be more appropriate, especially when private-sector incentive structures for sustainability are lacking or misaligned. The Banca d’Italia’s Enrico Benardini noted that central bank and supervisor-led action was an important foundation for ‘standardisation in both the assessment and disclosure fields’. In his opinion, it is essential to overcome the inconsistencies underlying the dispersion of ESG scores via regulatory guidance and signposting as the ‘dispersion of ESG scores could lead investors to set up their own materiality metrics via granular data from providers to get their own ESG scores’. In the absence of stringent top-down monitoring and regulation, self-reported ESG data and disclosures could obscure the true level of risk faced by companies and risk greenwashing. Wang Yao, the director general of the International Institute of Green Finance, expanded noting, ‘companies will tend to only disclose information good for them. So that's why the regulators should monitor environmental information disclosures’.

Similarly, Keith Lee said, ‘Companies want to make sure that everything is perfect on their end before wanting to disclose it, for fear of the kinds of issues, reputational or other kinds of risks that they get exposed to if they start talking more openly about some of these ESG issues’. In such environments, Satoshi Ikeda said, ‘From a capital market regulator's perspective, agencies can also lead the way in intentionally putting in place mechanisms for incentivising disclosures’. Regulatory involvement in promoting the correct attitude for using non-financial data is seen as critical by other respondents in Asia Pacific. Keith Lee saw reporting guidelines as a good step, whereas others warned against a ‘box-checking approach’, saying that, ‘Any kinds of regulatory initiatives with a compliance angle could unfortunately indirectly promote that approach to box-checking. There's a need to complement that with helping investors understand the business case for ESG’.

Although regulators from emerging markets are primarily concerned with the suitability and popularisation of unfamiliar standards for non-financial data and disclosure in their economies, developed market regulators face the challenge of establishing consensus on existing standards and environmental policies. For instance, despite the overarching guidance provided by EU-level regulations such as the NFRD, Aurel Schubert, director general of statistics at the ECB from 2010-18, shared his view that 'the challenge within the Eurosystem is always to get an agreement and get common [data] systems between all the 19 central banks'. In response to similar views, the NFRD is being reviewed. (Report pp. 15-16).

The key take away is that there is as yet no consensus on measurability.  Nor, it seems, is there consensus on the appropriate vector toward its attainment.  That old debate between the value of "top down" versus "bottom up" continues without consensus. Strategically, that gives current data drivers (enterprises and NGOs) some leeway in driving the conversation about  the forms and operation of a consolidated system of data mining and use. Left undisclosed are issues of ownership, privacy, use and the like. 

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