Anticipating Climate Finance Policy Shifts

The advantages of using PolicyScope’s CRRM3 alternative data generated from the public policy process extend well beyond volatility trading. The documented advance correlation with market volatility generates attention, of course. But discretionary and quantamental traders derive at least as much value from alerts generated by our patented process. They can use our data to “catch the wave” across a range of issues from monetary policy to climate disclosures policy.


Today’s example comes from the climate context.


Background

Momentum has been building to increase a broad range of financial regulatory requirements regarding climate-related risks since January 2020 when the Bank for International Settlements and the Banque de France published their “Green Swan” paper.


The move inspired us to direct our patented metadata process to begin quantifying climate-related financial policy in early 2020 and to map our data to economic sectors in 2021. We therefore have the ONLY multivariate time series data available to market participants, analysts and advocates that captures the full arc of climate-related financial regulation policy.

The Italian Presidency of the G20 during 2021 intensified activities, with nearly all major national policymaking bodies in Europe and international standard setters in securities and accounting issuing policy pronouncements.


How can strategists and analysts use the data? Read on....


On March 10 of this year, we noted that the geopolitical drive for energy independence from Russia would incentivize policymakers to accelerate their climate-related activities including in climate finance. In October 2021 -- long before Russia's invasion of Ukraine -- we noted that climate-related finance risks would like to increase during 2022.


On March 22, the Securities and Exchange Commission in the United States finally spoke. The time series for last week looks like this on our Bloomberg Terminal App:

That sharp upward slope for action triggers alerts for our API data customers. Discretionary traders, impact investors, and quantamentals would use the trigger to dive deeper into the underlying verbal data (not pictured).


Citing a “proliferation of third-party (non-government) reporting frameworks” and accelerating rulemaking activity in the European Union, the regulator for the largest, most liquid capital markets in the world proposed new quantitative, governance, and qualitative disclosure requirements in

· registration statements,

· Exchange Act annual reports,

· dedicated sections of all Regulation S-K reports,

· Regulation S-X metrics AND

· in a note to audited financial statements

All disclosures would also be required to include XBRL tags to facilitate automated machine reading. If the rules are finalized by YE2022, the SEC proposes to phase in implementation from FY2023 to 2026, with the first disclosures issued 2024. The US Treasury Department was quick to issue a supporting statement as a way of addressing potential financial stability risks associated with climate change.


We leave it to our colleagues at law firms, consulting companies, and newsletters to analyze the content. We just observe here that quantitative disclosures within audited financial statements creates real potential legal liability if a company makes a material misstatement.


International prototype disclosures were due to be released by the International Sustainability Standards Board (ISSB) by the end of 1Q202….this week. Comparisons between this international proposal, the EU proposals, the US proposals, and the 2021 UK proposals are inevitable.


The Data Advantage

Policy shifts may drive price action, but the absence of solid climate-related risk data means markets are not yet pricing climate risks at scale. Current use cases for this data set see a center of gravity in capital markets among discretionary impact investors and quantamentals seeking to spot shifts and start identifying strategic investment opportunities (as well as risks) proactively.


Advocates and analysts feeling the pressure to anticipate policy shifts in light of the rotation away from Russia also can use the tools developed for capital markets to accelerate their own ability to connect the dots and increase the efficiency of their advocacy capital allocations.


Catching the Wave and Alerting

The policy process regarding climate-related financial risks so far exhibits long-form cycles:



Note that despite all the post-invasion activity, aggregate action so far during March has not yet exceeded October 2021 levels. We still have one week to go before the end of the month. The SEC's move is likely to trigger reactions function at the international and European levels. Analysts and investors using CRRM3 data are both prepared for a busy week AND they are able to place the activity into a broader context using our analytical time series data.


Policymaking in this context is a profoundly international one, with a complex public discussion underway. Our 9+layers of patented analytical automation reads more content in any given 24 hours than any human could absorb. Our data provides perspective on where the majority of activity was centered, enabling human readers to conduct more efficient information triage and devote their scarce time to the most high value documents.


Bloomberg Terminal users have immediate access to the charts and underlying documents immediately through our V3 PolicyScope Data App. The app also delivers interoperability with selected Bloomberg functions to help sophisticated investors connect the dots faster. They can see with a touch of a button whether (or not!) futures markets are reacting to the observed policy shift, how their own portfolio positions are prepared for the observed policy shift, what Bloomberg Intelligence and market sentiment are saying in real time.


Automated News Feed Add-Ons

We know that reading at scale increasingly is an internet-of-things (IoT) activity. Capital markets in particular make intensive use of institutional news feeds parsed by increasingly sophisticated natural language processing. However, as we noted HERE recently, concentration risks exist because the acquisition of news feeds at scale omits the much larger amount of information generated from the official sector which never makes it into the news cycle.

Capital markets mistakenly believe they have access to all the relevant information because they consume media at scale. But they are only seeing the tip of the iceberg when it comes to public policy risks.


Our data mining licenses permit us to use our patented process to score news data from leading high-quality, fact-checked media sources like Dow Jones and Thomson Reuters....in addition to official sector sources. The result: clarity that the scale of official sector activity regarding technical issues like climate-related disclosures is under-reported.




About BCMstrategy, Inc.: The company helps portfolio managers and strategists anticipate market volatility related to public policy/headline risk and take strategic positions in the market by delivering quantitative volume-based objective data drawn directly from the public policy process paired with data generated from media coverage from fact-checked journalism publishers like Dow Jones and ThomsonReuters. The full data set is available exclusively through the Bloomberg Enterprise Access Point. Volatility signals are available via API. Charts, graphs, and verbal data are available through the V3 PolicyScope Data app on the Bloomberg Terminal at: {APPS PLCY <GO>}.