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Sunday Brunch: is disclosure the 'exam technique' of sustainability?
(photo by Museums Victoria on Unsplash)

Sunday Brunch: is disclosure the 'exam technique' of sustainability?

Disclosure is important but is there a danger that it becomes the tail wagging the dog?

When it comes to sustainability from a corporate perspective, there has been a heavy focus on disclosure as recent years have seen an acceleration in the implementation of frameworks and standards requiring management and operational teams to provide new disclosures. ISSB S1 and S2, CSRD, SFDR, TCFD and Nasdaq’s Board Diversity Rules are just a few examples of requirements that have either been finalised or became mandatory just in 2023!

Disclosure is important so that stakeholders, be they investors, employees or customers can clearly understand how a business is being sustainable and compare it with their other interests.

However, there has to be a business strategy too. That may seem obvious, but with the concepts behind ESG and sustainability being new to many, and the very 'compliance' nature of disclosure requirements, there has been a tendency to lean towards “What’s the minimum that I need to do?” 

For sustainability professionals, and particularly Chief Sustainability Officers (CSOs) that has meant an evolving role. As Alison Taylor and Robert G. Eccles put it:

"Historically CSOs have acted like stealth PR executives - their primary task was to tell an appealing story about corporate sustainability initiatives to the company's many stakeholders, and their implicit goal was to deflect reputational risk."

Alison Taylor, Robert G. Eccles, "The evolving Role of Chief Sustainability Officers", HBR

However, the role is becoming more strategic and how what a business choose to do - or not to do - can help the broader business environment (which also includes THE environment!) and its own sources of competitive advantage.

Steven dived into the topic in a recent blog which you can read here 👇🏾

The evolving role of a Chief Sustainability Officer
As a prospective CSO perhaps one of the first questions you should ask of your new employer is ‘who will I report to’. The closer we are to the financial and strategy decision makers, the more influence we can have.

Strategy and disclosure are an 'inseparable pair'. We need both, particularly if we are to raise finance and frankly get things done. There is a positive feedback loop between them.

I found a parallel with how we study at school, at university and even in professional exams. How we learn. How we study. How we are assessed.

In many ways there is a 'tail wagging the dog' situation. We have historically been taught to pass exams first and foremost and not necessarily to understand the knowledge. League tables have only exacerbated that.

There is a key issue: the confusion between measures and targets. The target should be to equip children with the knowledge they need for life, how to apply it and how to learn. Exam success is a measure.

As Charles Goodhart famously postulated in the 1970s, which has come to be known as 'Goodhart's law':

"Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes."

Charles Goodhart, "Problems of Monetary Management: The UK Experience" 1975

Or more simply, "when a measure becomes a target, it ceases to be a good measure."

Memorising and regurgitating can seem more efficient in an exam, but is it? I'll start with an example from my ... [big yawn] securities regulation and derivatives exams from 2001.


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Two cards or twenty?

Back in 2001 I moved from PwC to work on the trading floor at Morgan Stanley. One of the requirements was that I needed to be FSA regulated (now FCA) which included taking the regulatory and derivatives exams. To be frank the regulatory part was a big 'memorise the telephone book' exercise but I enjoyed the derivatives bit. It was mathematical and it suited my brain. I learned and understood the basics of the two fundamental options - calls and puts.

A call option gives the holder, for a relatively small upfront cost (the 'premium'), the right to buy a stock at a particular price (the 'strike' price) up until a specified date ('expiry'). They are not obliged to buy ('exercise' their option) hence the name 'option'. A put option gives the holder the right to sell at a particular price up until a specified date.

Options can be used to limit the loss on a position or magnify your gains given the small size of the premium relative to the price of the underlying stock.

Each option has a particular payout diagram which shows how much the buyer or seller makes as the stock price changes. Here are the basic ones for buying a call and a put (going 'long').

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