Recently, I was asked why the Transparency Label Initiative treats transparency as a 0/1 variable.  The reason is either there is adequate disclosure so an investor can know what they own or there is not.

Let me give you an example of why the Initiative does not use a scale from say 1 to 7 where 1 is transparent and 7 is opaque.

Imagine a company that is a large manufacturer with a finance subsidiary.  The company’s disclosures for the manufacturing portion of the firm qualify for a 1.  The company’s disclosures for the finance subsidiary qualify for a 7.

So on average, the company would receive a 4 ((1+7)/2).

How should investors interpret a 4?

Should investors interpret a 4 to mean the company is semi-translucent and only some of the information the investors need to know what they own is hidden?  That raises the question of what information is missing and how does the missing information impact the assessment of the risk of the company?

Why should investors be guessing about a disclosure label?  Either the investment provides the necessary disclosure so an investor can know what they own or it doesn’t.