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INCR propose listing standards for stock exchanges

For years, sustainable investors and other advocates for corporate responsibility have been hammering away at companies, emphasizing the necessity of producing sustainability reports. Not only do sustainability reports account for environmental, social and corporate governance (ESG) factors, increasingly, analyses are finding that corporate reporting on measures addressing sustainability helps yield long-term financial benefits as well.

The success of advocacy efforts by shareowners and others has led to a sharply increased number of such reports in the last year alone. According to a report issued in December by the Governance & Accountability Institute, non-reporters are for the first time in the minority in both the S&P 500 and Fortune 500 indexes.

Nevertheless, the case remains that "increasing integration of sustainability issues into investment decisions is hampered by inconsistent and insufficient corporate reporting," according to a recent paper published by the Investor Network on Climate Risk (INCR), a network of 100 investors managing over $11 trillion in assets under management. INCR was launched by Ceres in 2003.

The paper serves as a proposal "to help build global investor support for a listing standard for stock exchanges on corporate sustainability disclosure." Drafted by INCR's Listing Standards Drafting Committee, it grew out of dialogues between INCR and NASDAQ as well as several other stock exchanges.

At last year's Rio+20 conference on sustainable development, NASDAQ was among the five stock exchanges that agreed to promote reporting by listed companies on ESG risks and opportunities.

Why is a focus on stock exchanges important for the mainstreaming of sustainability measures? As noted earlier, shareowners have been filing resolutions calling on companies to issue reports addressing ESG issues for many years. Overall, their efforts have met with success, but taking on one company at a time requires significant expenditures of time and money and may result in corporate reports that fail to adhere to comparable standards.

Government regulation could achieve in one sweep what sustainable investors have been striving to accomplish for so long, and indeed the Security and Exchange Commission's guidance on climate risk disclosure, issued in 2010, was hailed by sustainable investors as an important development in the history of corporate sustainability reporting.

Talking with SocialFunds in 2012, Rob Berridge of Ceres observed of the guidance, "We think that the work investors did prior to that got companies to recognize climate change as a risk, which made it easier for the SEC to issue its regulatory statement."

However, in the United States the conservative demonization of big government has made it difficult for federal agencies to issue regulations that keep pace with a world increasingly beset by multiple crises — climate change and global overconsumption, to name but two — and as a result the filing of shareowner resolutions, requesting that one company after another agree to issue sustainability reports, continues.

According to INCR, stock exchanges are in a position "to be critical levers for improving the depth, consistency and comparability of corporate disclosure on climate change and sustainability performance." A 2009 report from EIRIS helps clarify the potential impact of stock exchanges on sustainability issues, noting that enhanced disclosure requirements could reduce risk and increase competition.

"As the long-term sustainability of our current financial models are brought into question," EIRIS stated, "stock exchanges are well positioned to restore confidence in the market in the short-term and could, through improved ESG disclosure, drive market efficiency as better managed companies are rewarded."

Sustainable Stock Exchanges (SSE), an initiative originally convened by the United Nations in 2009, seeks "to enhance corporate transparency, and ultimately performance, on ESG issues and encourage responsible long-term approaches to investment." In 2010, the Johannesburg Stock Exchange (JSE) began requiring its more than 450 companies to produce integrated reports. And last year, BM&FBOVESPA, the Brazilian Stock Exchange, adopted a report-or-explain position to encourage sustainability reporting by listing companies.

Increasing numbers of stock exchanges have launched sustainability indexes as well.

INCR's proposal recommends that stock exchanges mandate materiality assessments by companies, "to make it clear that material ESG matters are required to be included in financial reporting."

"Only when ESG information is universally reported in one of the main sources of information used regularly by all investors and analysts — financial reports — will capital markets be able to value companies based on more than a narrow set of financial indicators that give a limited picture of risk and opportunity," INCR stated.

Without specifically endorsing the Global Reporting Initiative (GRI) as the standard for corporate sustainability reporting, INCR recommended also that companies provide a link on their websites to GRI's Content Index. The Index contains a comprehensive set of key performance indicators and also provides information for investors as to whether companies have provided disclosure and where that disclosure can be found.

Companies should report on their performance relating to eight key sustainability measures, according to INCR, "using a comply or explain approach":

  • Climate change
  • Diversity
  • Employee relations
  • Environmental impact
  • Government relations
  • Human rights
  • Product impact and safety
  • Supply chain

This article reprinted with permission from SocialFunds. 

Photo of hands holding globe provided by Andrej Vodolazhskyi via Shutterstock.

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