Panel discussion: Standards to Manage Investment Risk
This is a guest post by Mohini Singh, ACA, Director of Financial Reporting Policy at CFA Institute.
At a recent XBRL US Investor Forum I spoke on a panel on ‘Standards to Manage Investment Risk’ with Mike Willis of the Securities and Exchange Commission (SEC) and the Council of Institutional Investors’ Jeff Mahoney, moderated by Jeff Naumann of Deloitte.
We opened by discussing some of the profound changes to our personal and professional lives from the Covid-19 pandemic, and considered what kind of data investors and analysts are looking for during these trying times. Granular, structured data that is machine readable is increasingly important and valuable in decision-making.
In particular, Covid-19 has demonstrated the importance of quarterly reporting. When investors all over the world were scrambling for information, US companies had an earlier reporting obligation than other global companies as they had to report for the quarter ending 31 March 2020. European and Hong Kong public companies, for example, with no interim reporting obligation until 30 June 2020, did not have to produce results until July or August – and in some jurisdictions, they were planning to further delay those timelines.
We at CFA found that investors were desperate for even limited information rather than no information at all, and that without it they were being forced to make worst-case-scenario assumption, highlighting the delicate balance between reliability and relevance. As SEC Chairman Clayton stated back in April, “Our investors and our markets thirst for information as a general matter. This is particularly the case in times of economic shock and uncertainty,” and an inability to file required reports does not, for example, prevent issuers from issuing earnings releases.
Covid-19 has also underscored the importance of environmental, social, and governance (ESG) disclosures, particularly around climate and human capital. The panel therefore next addressed climate change and health risk trends: how they continue to be hot topics in the political discourse; how important these disclosures are to investors and regulators today; and why, while traditionally there’s been a greater focus on these issues in non-US markets, that is starting to change. ESG is no longer purely a matter of social responsibility, but an important driver of value. We noted that the EU is currently leading this discussion and markets that ignore these issues risk allowing the EU to be their de facto regulator on these issues as large multinationals will have to follow EU rules which will then become a competitive advantage that others have to adopt.
Here we touched on the shared vision for a comprehensive corporate reporting system announced in September by the Carbon Disclosure Project (CDP), the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) – and observed the importance of underpinning this with a single shared taxonomy.
We ended the discussion with a dive into data standards and the impacts and challenges of XBRL-based reporting, over a decade on from its first introduction by the SEC. There is a perception among some companies that the SEC XBRL data is being lightly used and with limited impact; the panel shared their views that investors are not only using the data but are interested in obtaining standardized data for other types of disclosures as well, such as Management’s Discussion and Analysis (MD&A), earnings releases, proxy and corporate actions. XBRL makes certain kinds of information much more accessible to analysts, and the evidence show that investors make substantial use of XBRL data even for smaller companies, although they may not always be aware that the information they can see is being driven by XBRL.
We also considered data quality issues in XBRL filings – including how quality can be improved through increased use of validation rules, better regulatory enforcement and assurance – and the different approach that the EU has taken with required assurance of digital filings.
You can watch the panel in full here.