B (5:08)

Yeah, sorry to interrupt you because you really struck me there with this analysis of the historical context of the way regulations built up in the EU and the US and UK and the carrot and stick. And that really spoke to me because one of my big bugbears has been that in the EU we follow continental approaches to legislation. We follow the Napoleonic Code, which is far stricter. And it actually, you have to say in your legislation and then companies will follow if you don't, they think we don't have to follow. That's that stick approach. And in common law, which the UK and the US have, you have much more. This, this carrot because it's based on case law and the sort of, you know, you hope that by example things will osmos into what it's supposed to be and that I really, I thank you for raising this because it's, it's something that's not enough talked about. I do try and raise it, but of course it is complex. And then you have for example, Iosco, which is the international organization of securities regulators who's trying to promote global standards. Can we do this?

C (6:14)

I think the answer is yes. Certainly from a promotion standpoint that has been happening. I think Iosco has been functioning as intended, as designed to coordinate approaches, ideally avoid, you know, regulatory conflicts, especially when it comes to knowledge sharing. I think Iosco has been key. Iosco's role, particularly after the global financial crisis I think has really come to the fore. And you know, you could say that the coordination amongst national financial services regulators really took a step up after the 2008 financial crisis. So we saw that initially from 2010, 2011 and onward with increased regulation with respect to risk shifting to risk based regulation, increased regulation for reporting and disclosure. That's under the theme of transparency. That was a sea change really in the amount of reporting, the types of reporting that firms are required to provide. And there we saw the role of the Financial Stability Board and Iosco really come to the fore. And as far as I'm concerned, the way I see it is that response by the international regulatory community and central banks to the financial crisis really set the stage for the more rapid proliferation and harmonization of sustainable finance regulation globally. You could say that the pump was well primed. And so as I read different sustainable finance regulations, certainly there are differences, but there are plenty of common threads and that's really evidence to the work of bodies such as Iosco.

B (8:04)

Yeah, I think you're right. I attended the Iosco annual conference and the closed meetings in Athens which was really interesting because of course sustainability was at the fore. Emmanuel Faber of ISSB was there and it was clear. I also hopes by supporting the ISSB that we will come to that more global context and discuss and I think it is necessary for institutional investors, certainly asset managers, but retail investors ultimately to have a more even platform where you can look through a sort of more homogenized lens. The EU though is leading the international agenda and on speaking to several key people in DG fisma, the Financial Services Directorate of the EU Commission, they are very aware that they're leading and that sometimes they get penalized because they're proposing and sometimes things are perhaps too much, too little, not clear enough as we have seen in some of the Level 1 legislation on SFDR etc so again, what do you think as from your perspective, how do investors outside the EU view the EU regulatory plans? I know there have been complaints, but they've also been positive because they are trying to lead. So what do you think were the pluses and minus perhaps, and what can be taken as an example for other regions?

C (9:36)

Yeah, I agree there are pluses and minuses. And again, you know, you used the word complex early on here and I agree it's a complex world and it's difficult to represent such a diverse community as the international investment community. They come at it from all sides. But I would say, you know, on the plus side, the EU regulations are poised to provide responsible investors, sustainable investors, with an unprecedented degree of visibility into the companies in which they invest from a sustainable sustainability related financial perspective. Certainly there'll be a trove of new information for investors to mine. That's really on the plus side. I think on the minus side, there is an issue with the EU disclosures not being sufficiently aligned with the new global baseline. From an investor's perspective to have a certain uniformity and consistency in the data available to you, as long as it's sufficient, then all else equal. You prefer uniformity. You want to be able to analyze companies, research them, screen them on a fairly uniform basis, promotes scalability and efficiency. And the differences of the European, the Corporate Sustainability Reporting Directive, in particular, some of the new data that will be available due to the Corporate Sustainability Due Diligence Directive. This does mean that there will be more of an apples and oranges exercise when thinking about, you know, researching European reporters versus non European. That's more on the, on the negative side. One thing I'm really not sure about is the extent to which investors consider the new requirements to be excessive. Placing an over, you know, too great a burden on companies and really representing increased costs without financial payoff. And I, I don't have a view about that, realize how investors are thinking about that.

B (11:46)

I think that's tough and I think it probably needs a bit more time to see how investors are taking up. And on the kind of information you mentioned, the Corporate Sustainability Due Diligence Directive, this again is very complex. It took a long time to negotiate. It was watered down significantly by several member states. Understandable because of course corporate governance is managed really by local regulations. It's based on local company law and there is no EU company law, basically. So again, this is a complex directive to bring into place. And of course supply chain is incredibly complex for large companies. I know it was watered down to the very largest companies. But even there, how many companies in the supply chain could a very big multinational have? So what do you think about that CSDD as we call it?

C (12:51)

So I do have a few thoughts about that. I will mention just to qualify my statements a little bit, A regulation such as the CS Triple D is a bit upstream of my focus. So I, as you mentioned, I focus on primarily financial services regulation and buy side. And so I take an interest in the CSDD from the perspective of what is the new data that will be available to my clients investors once this regulation goes into effect and companies start disclosing and reporting more. So I'm not deeply steeped in it is really my point. But I'm, I find it a, you know, fascinating what's happening with sustainable finance and this establishing a due diligence duty for corporations is a significant part of the overall trend and it's a material change. One of the ways I think about this is kind of with a historical lens and apologies if this gets a little too theoretical, but the creation of the corporate veil, let's call it 100 years ago, a little bit more depending on jurisdiction. That separation of liability between the owner of the company and the company's liabilities was radical at the time and it really unleashed, enabled the flow of capital in a whole new way globally. Part of the deal with the corporate veil, putting that in place was to enable investors to make investments without too much regard for the conduct of the companies that they were investing in. With sustainable finance, responsible investing, what we're seeing is that although the corporate veil remains in place and shareholders are not legally liable for the debts or liabilities of the companies, they're taking an increasingly great interest in what those companies are doing. There's plenty of good reasons for that. You can think about corporate reputational risk, regulatory, legal violations, all these things. But I just find it interesting that while shareholders are legally separated from liability, they are more interested in what their investing companies are doing than ever. You know, the challenges with a due diligence duty that spans your global supply chain are tremendous. And you know, with regulation we have this push and pull constantly. And it's not just with sustainable finance regulation, it's not just with the due Diligence directive. You know, you can think about MiFID 2, you can think about Dodd Frank and Basel III and so on, the Solvency 2 directive. Many of these regulations and directives impose new requirements for companies to obtain master new data, develop new disciplines and skills and abilities, and that they didn't have before they didn't need to have them, they didn't have them. As the regulations bed in, as firms become accustomed to complying with them, as the, as private industry responds to the, to the market gaps that the regulations create, these things tend to get more efficient. New disciplines do become widespread, operations do become more efficient, but there's always that concern with the initial cost for sure, whether it's feasible to meet the requirements of the regulation. I think that's especially challenging here. You know, I could probably go on about the challenges for a while, but I think they're substantial and it will remain to be seen how fully corporates over time are able to actually implement efficient oversight over supply chains. Another interesting aspect here, if you don't mind, is the question of regulatory oversight capability. What we've seen with the post financial crisis regulations, new risk regulations and now with sustainable finance and climate risk is that the financial regulators themselves need to build out their capabilities. There's a lot of capacity building going on. They need more budget, they need more expertise. Their expertise has to mirror the expertise required of the firms that they oversee.

B (17:24)

You know, and that is something really, because what you just said that there, the expertise of the regulators has to mirror firms they oversee is so true. I remember in the sort of height of the financial crisis, I was working in the European Parliament as an expert at that stage and remembering the phrase, you need a thief to catch a thief. This is very, of course, very broad, very general, whatever. But you do need to have that capacity. And actually in the Iosco conference the buzzword was subtech. It was really all about getting that capacity building in the regulatory community in order to face huge challenges. Now, you know, data is a little bit your DNA as well and you deal with this. We still have issues with qualitative issues and reliability of data. We're having a mass of data in front of us. How can AI help with this?

C (18:25)

I think the prospects and promise of AI as applied to corporate sustainability disclosures is great rate. It's through not just the sustainability related financial disclosures, but of a lot of other alternative data and I think increasingly as well, sort of standard financial information. You're quite right that in the sustainability disclosure space there is a preponderance, a significant preponderance of qualitative information. And you know, you look at TCFD reports or if you look at Thai company 1 report, these can be 200 page documents. If you're an ESG analyst covering 10, 15, 20 companies, it's a significant challenge. It's a Superhuman challenge to really be able to dig into all of those, you know, sustainability reports, link them to your financial models and so on. So the new generative AI, the foundation models as fine tuned for some of this work. I think they're going to be a game changer. That's how I view it. Certainly at our company, we are rolling out, increasingly rolling out AI powered components to our products, our interface. We're seeing a real difference there already, I'd say a lot of us in the financial community are really, we sense that we're on the cusp of something much bigger and we're taking those initial steps. The initial steps continue to show promise. So I think it's much more, much more to come within the organization that I'm in. So it's really the data Solutions organization at FactSet, I would say the mentality is AI first. We should always be thinking about what AI can do, how it can be leveraged. That's just the mindset today.

B (20:22)

So in the words of a famous author, a brave new world indeed, but one based on history and looking back can enable us to move forward. And I think you very cleverly highlighted this in our conversation. And Niels, I really thank you for this. I found it very enlightening and I really enjoyed talking to you. Before rounding up this podcast, let me tell my audience that we have a new host joining Deborah Kidd and myself. She is Nicole Garrick. She's the director of the Global Industry Standards at CFA Institute and is responsible for research, development and promotion of ESG codes and standards. And she worked for a long time at PGIM Fixed Income as an ESG specialist. So I'm sure she's going to bring her little granule of wisdom to this podcast and she will be hosting the next one in July. But for me today, Nels, it was a real pleasure to talk to you and thank you very much indeed.

C (21:20)

Likewise. Thank you so much. It was a real pleasure and it'll be interesting to see where all this goes in the next 1, 2, 3 years.

B (21:26)

I agree, I agree. Thank you very much, Nil.