Extrafundamental Analysis

Extrafundamental Analysis

Sustainability Reporting in XBRL

16th XBRL International Conference at the Sheraton Wall Center, Vancouver Canada, December 5th 2007v1.10

Disclaimers

First, disclaimers.

Disclaimers

#1 : We love the English language.

But our hearts speak French.Please excuse the bad accent.

Disclaimers

#2 : There should be a sustainability track.We chose the taxonomy track because an

interoperable sustainability reporting taxonomy is the current challenge in extrafundamental analysis. But

otherwise, there is so much to say about extrafundamental analysis, and sustainabilism in

particular. 30 minutes is not enough. Prepare your questions.

Disclaimers

#3 : Two new words today.

“Sustainabilism” and “Extrafundamental”We’ll start with explaining those in a moment.

Objectives

This presentation’s objectives.

• Define “extrafundamental” and “sustainabilism”;

• Expose the taxonomy and XBRL issues;

• Look at what’s ahead.

Definition

How does this all fit together?

Definition | Axioms

Axioms of extrafundamental

analysis.

Definition | Axioms

Axiom #I : Arbitrage is everywhere.

It’s there to stay and that’s good. Arbitrage does not only occur because of discrepancy of information. It is

also caused by the variation in which financial knowledge is derived from the said information. Extrafundamental

analysis, in finance, is the management of arbitrage exploitation. Exploitation of arbitrage somehow also

implies its minimization…

Definition | Axioms

Axiom #2 : Arbitrage is consistently minimized.Once it is possible to coherently monetize performance over a given metric for which data is publicly available,

the said metric is gradually incorporated into fundamental analysis. It then ceases to be considered part

of the extrafundamental domain. Metrics subjected to this process may or may not originally be of financial

nature. When not, we say they have extrafinancial origins.

Definition | Fundamental Theorem

Extrafundamental Analysis’ Fundamental

Theorem.

Definition | Fundamental Theorem

Yes, we know.

Definition | Fundamental Theorem

Finance is Negentropic.More and more metrics taken into account. More and more elegant models. Wealth creation always more and more complicated. Arbitrage is the difference in pricing

model performance.

Definition | Historical Evidence

Historical evidence of the extrafundamental metric and analysis

necessity.

Definition | Historical Evidence

17th & 18th centuries : Capitalism

Private property & public trading. Infancy. David Hume.

Definition | Historical Evidence

19th & 20th centuries : Liberalism

Inflation, limited liability, corporate personalism, privacy, speculation & GAAP. Teenage. Max Weber & Milton

Friedman.

Social

Environment EconomicViable

Sustainable

Bearable Equitable

Definition | Historical Evidence

21st century : SustainabilismInformation, reputation, due

diligence, globalization & chaos theory. Adulthood. Herman E.

Daly.

Definition | The Real World

How does it all live, in the real world?

Definition | The Real World

The current main focus of extrafundamental

analysis :sustainabilism, sustainability reporting, etc. and both terms will be used interchangeably from now on.

Definition | The Real World | Why & Who (Production)?

Why are extrafundamental

reports produced and who produces them?

Definition | The Real World | Why & Who (Production)?

5 reasons. For each, a specialty :

• Consultative and normative reporting;

• Declarative reporting;

• Editorial reporting;

• Analytical reporting;

• Decisional & executive reporting.

Definition | The Real World | Who & Why (Consumption)?

Who uses extrafundamental

reports?

Definition | The Real World | Who & Why (Consumption)?

Potentially anyone. Many reasons. Examples :• Trustees & other asset managers;

• Beneficiaries;

• Private individual investors;

• Analysts;

• Companies themselves;

• Regulatory commissions.

Current Issues

Current Issues.Extrafundamental reporting. Sustainability taxonomies.

XBRL interoperability.

Current Issues | GRI | Caveats

The GRIGRI is the most recognized standardization body for

sustainability reporting with an established development process. GRI's G3 guidelines are the most widely used

standard today.

Current Issues | GRI

The GRI G3 XBRL Taxonomy.

• Its XBRL taxonomy serves as a starting point for future developments;

• Demonstrates that sustainability reporting does belong to XBRL;

• Gives something concrete as a starting point for broader advocacy of XBRL technologies within the sustainability reporting community.

Current Issues | GRI | Caveats

What’s wrong with the GRI taxonomy?

…and not the GRI itself…

Current Issues | GRI | Caveats

Excellent proof of concept. Lacks mass deployability :• Stops at indicator level, doesn't define metrics;

• Lacks calculation and definition linkbases;

• Lacks corporate governance indicators;

• Lacks wide internationalization of the guidelines themselves and of the label linkbase in particular;

• Lacks the notion of policy and sensitivity;

• Presentation linkbase only provide for "normative reporting policy" and "declarative performance statement" reports;

• Reference linkbase most definitely incomplete;

• Does not provide guidelines for participation to the DTSes;

• Lacks extensibility guidelines and policies.

Current Issues | GRI | GRI In Numbers

Taxonomies Compared

GRI GIR Vigeo

Root Levels

Indicators

Metrics

Users

4 3 6

121 230 37

0 562 >1000

~500 ~30 ~70

Current Issues | Solutions

So what, now?

Current Issues | Solutions

Extrafundamental XBRL Roadmap.

Ontological Negotiation

Ontological Formalization

Taxonomy Development

Internationalization

XBRL Representation

Advocacy

Current Issues | Solutions | Ontology

What’s with this ontological stuff?

Current Issues | Solutions | Ontology

Ontology & Ontological Engineering.

Study of things in themselves. Ontology as formal dictionary. Concepts and relationships between them. Ontology vs. Taxonomy. In XBRL, it roughly equates to

the XSD schema part of the taxonomy.

Current Issues | Solutions | Ontology | Examples

Really?

Industry

Instrument

Company InstrumentType

InstrumentFeature

Installation Meeting

Motion

BoardCandidacy

BoardMemberCandidacy

Manager VerificationFirmCandidacy

VerificationFirm

TreatmentPlan

Current Issues | Solutions | Ontology | Examples

Company

Issue

Dimension

Aspect

Indicator

Metric

IssueNormalizationRule

IssueSensitivity

IssueWeight

Current Issues | Solutions | Ontology | Examples

Issue

ShareHolderPolicy

Issue

IssueNormalizationRule

IssueSensitivity

IssueWeight

Current Issues | Solutions | Ontology | Examples

Sensitivity

Indicator Metric

IssueNormalizationRule

DiscreteMetric

CummulativeMetric

FreeUndeterminedMetric

SimpleUndeterminedChoiceMetric

MultipleUndeterminedChoiceMetric

NumericMetric

MetricUOM

MetricFormat

DateMetric

Current Issues | Solutions | Ontology | Examples

Metric

Company

Installation

Motion

BoardCandidacy

BoardMemberCandidacy

VerificationFirmCandidacy

IncentivePlan

Manager

VerificationFirm

MetricValue

Metric

Current Issues | Solutions | Ontology | Examples

Value & Context

Current Issues | Solutions | Ontology

Extrafundamental Performance Quote.

Qp =�

i

wip · fip(−→mi)

p ∈ Policy, i ∈ Indicator,m ∈ Metric

What’s Ahead

What lies ahead.

What’s Ahead

GRI Announcement :Work on the 2nd version of the XBRL taxonomy

starting in January 2008.

What’s Ahead

The Future of Sustainability Reporting.• Sustainability Knowledge Management

Systems (KMS) and a workable, interoperable XBRL taxonomy;

• Sustainability data disclosure incorporated to regulatory filing obligations;

• Sustainability regression models and quantitative analysis frameworks integrated with trading and analysis platforms.

www.globalreporting.orgwww.investissementresponsable.com

www.nbourbaki.ca

Thanks! Questions?

Thanks!