How "Readable" are Sustainability Disclosures?

Throughout the Sustainable Finance Disclosure Regulation, terms like clear, concise, simple, succinct, and clear to investors are used to describe how sustainability information should be written. These terms collectively describe the readability of disclosures.

Readability is important from both social and business perspectives.

• From a social perspective: the Pensionsmyndigheten 's premium pension system makes everyone a mutual fund saver, and therefore it is important to target disclosures to the general public's reading level.
• From a business perspective: studies show that retail customers are more inclined to invest in funds with readable disclosures. We should strive to have readable disclosures in order to capture more retail market share.

Despite this, both financial and sustainability disclosures remain difficult to read. They contain a high perecentage of complex words (in the sense that they are long or have many syllables) which are used to add specificity. Readability is definately in the consumer's interest, but simplifying too much will obscure important information. Finding the balance that best serves retail customers is not a trivial task.

SFDR puts fund managers in a difficult position when it comes to readability - the product templates we are forced to use are difficult to read. We can demonstrate this by calculating the Lix readability index (l?sbarhetsindex) on the "blank" templates displayed above. Lix is calculated based on the average number of words per sentence and the percentage of complex words. Studies show that Lix works equally well for Swedish and English.

The Lix scores were 57 for Swedish and 59 for English. These scores require university-level reading comprehension. Everyone in Sweden is a fund saver, but according to SCB, Statistiska centralbyr?n only 28% of the adult population (25-64) has completed post-secondary education (3+ years). It stands to reason that template is too difficult for most fund savers, and this is before the fund managers even begin filling it out!

Where do we go from here? To me, there are three obvious things that fund managers can do:

1. They can strive to continually improve readability of their sustainability disclosures. This is in the best interest of both the consumer and the fund company.
2. They can continue working to improve financial literacy of the general population, especially in regards to the new sustainability disclosures.
3. When possible, they can advocate for improved product templates.

Lix Score for this post

The Lix score for this post is 49 - I guess I have to work on my own writing!

References

Anderson J (1983) Lix and Rix: Variations on a little-known readability index. Journal of Reading 26:490-496.

Arora J, Chakraborty M (2021) Does the ease of reading of financial disclosures influence investment decision? Economics Letters 204:art109883.

Bj?rnsson CH (1983) Readability of newspapers in 11 languages. Reading Research Quarterly 18:480-497.

Courtis JK (1987) Fry, Smog, Lix and Rix: Insinuations about corporate business communications. Journal of Business Communications 24:3-75.

Lee T, Yun T, Haley E (2017) What you think you know: The effects of prior financial education and readability on financial disclosure processing. Journal of Behavioral Finance 18:125-142.

Loughran T, McDonald B (2014) Measuring readability in financial disclosures. Journal of Finance 69:1643-1671.

Stone GW, Lodhia S (2019) Readability of integrated reports: An exploratory global study. Accounting, Auditing & Accountability Journal 32:1532-1557.