Sustainability reporting in stock exchanges 'comes of age'
As many as 21 stock exchanges across the world could introduce sustainability reporting standards in the coming months. They would join the 17 exchanges that currently recommend listed companies to report on environmental, social and governance (ESG) issues — going a step further by providing model guidance to participating companies.
These exchanges have pledged to list their guidance on the Sustainability Stock Exchanges (SSE) initiative. It's a peer-to-peer platform that invites global exchanges to promote ESG disclosure among listed companies and among each other. SSE includes over 60 exchanges — representing more than 70 percent of listed equity markets — and more than 30,000 companies with a market capitalization over $55 trillion.
"Sustainability reporting has come of age,"said James Zhan, director of the division on Investment and Enterprise at the U.N. Conference on Trade and Development (UNCTAD), which works on trade, investment, finance and technology issues in developing countries. Companies are demanding sustainability guidelines outside of the top-down push from government agencies and NGOs, he added.
The 21 exchanges "have confirmed to us they will introduce new guidelines either this year or within the first quarter of next year, and we know that many of them are close because they have posted draft guidelines on their websites for comment and discussion," Zhan's statement detailed.
"Business as usual" takes an unusual step
By reporting on sustainability issues, companies tend to act more sustainably, Zhan said, explaining the incentive of a positive correlation between strong sustainable performance and financial performance. The private sector is critical for achieving the UN Sustainable Development Goals, and involving stock exchanges could mobilize thousands of private companies to move forward.
After all, stock exchanges enable businesses to create value and jobs. They set the pace for corporate growth, but growth left unguided can kindle an unsustainable hunger for quick profits. At the same time, stock exchanges are responsive to market demand, political shifts and the cultures in which businesses operate. The market reflects when companies offer innovative products, better practices and transparent data, encouraging other organizations to follow.
Launched in 2009 by UN secretary-general Ban Ki-Moon, the SSE is a joint effort of the UNCTAD collaborated with the UNCTAD Investments and Enterprise Division, the UN Global Compact, the United Nations Environment Programmes Finance Initiative and the Principles for Responsible Investment (all organizations dedicated to the advancement of ethical, environmentally and socially sound business growth).
The benefits of breaking barriers
There has long been a call for bridging the barrier between sustainability and investor relations. A recent report by SustainAbility, Closing the Sustainability-Investor Relations Gap, makes the case for stronger internal engagement between sustainability and investor relations departments.
It outlines five points of misalignment between sustainability strategy and IR teams:
- Differing language used to describe and measure company performance.
- Investors desiring short-term results while sustainability teams focus on issues that play out over the medium- to long-term.
- Inadequate mutual comprehension and technical capacity in the respective disciplines of IR and sustainability.
- Lack of strong relationships between IR and sustainability team members
- Not enough staff or resources to integrate sustainability data to investor communications.
Yet healing this divide benefits all parties and boosts profits, SustainAbility says. And robust ESG reporting would attract new long-term investors seeking deeper business risk and opportunity analysis and who want to understand the business’s social and environmental context. Plus, sustainability teams with a good knowledge of investor needs would tailor their reporting to be more relevant and clearly communicate the financial value of their efforts. A company would gain greater trust and credibility with investors, as well as reduce the effort and time needed to respond to investor surveys and ad-hoc inquiries relating to sustainability.
Furthermore, according to SustainAbility, “Stock exchanges and other governing bodies are increasingly making changes to their requirements for corporate disclosure on these issues.”
An uptick of change
The stock exchanges that have committed to the SSE to provide ESG guidelines to their listed companies hail from all over the world:
- Norway – Oslo Børs
- Spain – Bolsas y Mercados Españoles
- Chile – Bolsa de Comercio de Santiago
- Denmark – Nasdaq Copenhagen
- Egypt – Egyptian Exchange
- Estonia – Nasdaq Tallinn
- Finland – Nasdaq Helsinki
- Iceland – Nasdaq Iceland
- Italy – Borsa Italiana (LSE Group)
- Kazahkstan – Kazakhstan Stock Exchange
- Kenya – Nairobi Securities Exchange (NSE)
- Latvia – Nasdaq Riga
- Lithuania – Nasdaq Vilnius
- Mexico – Bolsa Mexicana de Valores
- Morocco – Bourse de Casablanca
- Nigeria – Nigerian Stock Exchange
- Qatar – Qatar Stock Exchange
- Romania – Bucharest Stock Exchange
- Seychelles – Trop-X
- Sweden – Nasdaq Stockholm
- UK – London Stock Exchange
- Vietnam – Hanoi Stock Exchange
- Vietnam – HoChiMinh Stock Exchange
To date, only the Spanish and the Norwegian stock exchanges have published their voluntary ESG market guidelines. The latter, the Oslo Børs exchange, includes 213 companies and has a domestic market capitalization of more than USD $200 million.
Its guidance document backs up SustainAbility’s argument, stating:
Investors are increasingly attaching weight to a range of risks related to corporate sustainability. These risks include climate issues and the environment, corruption, human and labor rights, suppliers and customers, taxation and competition. These are areas that can be of great significance to the preconditions for a company to create profitability and shareholder value over the long term.
Elisabeth Adina Dyvik, senior project manager of Oslo Børs’ corporate responsibility initiative, elaborated to GreenBiz why the exchange had committed to ESG reporting guidelines in 2015, before others had submitted their guidance.
“Norwegian legislation has for several years included mandatory ESG reporting for companies that are listed on Oslo Børs,” she said. "But there are in some cases gaps between the information published by the companies and the information that investors and other stakeholders to be able to properly assess the companies’ ability to create long-term shareholder value.”
The exchange’s main challenge was finding a balance between meeting investors’ expectations for additional information while minimizing the reporting burden for listed companies, Dyvik said. And it developed the guidance in collaboration with a working group made up of an independent association of asset managers and representatives from the exchange’s listed companies.
The group consulted with issuers, member firms, investors, mutual fund managers and others important to the Oslo Børs exchange to ensure the draft was ready for its board of directors. The resulting guidance, which is based on the Global Reporting Initiative’s G4 Sustainability Reporting Guidelines, is a four-step process that begins with a materiality analysis.
“The guidance does not define indicators that companies should report on, but leaves it up to the companies to define relevant indicators to report on and follow up based on their materiality analysis," Dyvik said. Companies are recommended to start following the guidance starting in the 2017 financial year — and the exchange plans on providing a list of the companies that report per the guidance.
The guidance does not, however, require ESG reporting as a rule, or offer ESG-related training. Even though the Norwegian exchange lists Statoil ASA, which was embroiled in environmental controversy in the past (including protests over its shale gas drilling operations in the U.S.), the Carbon Disclosure Project has since ranked it as the top energy company in the world for renewable energy investments. It also applies an internal carbon price.
The U.S. New York Stock Exchange (NYSE), Euronext and the Shanghai Stock Exchange are conspicuously missing from the SSE’s list. The Shanghai Exchange's sustainability guidelines are supported by the International Finance Corporation. The World Federation of Exchanges, which is chaired by NASDAQ and comprises 25 stock exchanges including the NYSE, Deutsche Börse, Shenzhen Stock Exchange and the National Stock Exchange of India, includes overlap with some of the SSE’s guidance.
"Market expectations are shifting quickly and we see more and more stock exchanges viewing sustainability reporting as necessary and inevitable," said Anthony Miller, UNCTAD's SSE initiative coordinator. "Those expectations create their own momentum.”