Take a clue from stock exchanges to gauge sustainability's future
The world's stock exchanges, from NASDAQ to Deutsche Börse, have a unique procedure for measuring sustainability performance.
Trend analysis is nothing new. If you want to be successful in business, you’re always looking at trends, identifying patterns and following progressions — and doing it better and faster than the next guy.
Understanding the dynamics of influence is crucial to business survival, let alone staying ahead of the pack. Sustainability professionals must learn to master this particularly important skill.
Sustainability managers, directors and even officers constantly make the business case for their own position, project scope and budget. Understanding the global financial markets can help do just that.
If you want a powerful tool for predicting where the sustainability field is heading, just look at what’s going on with stock exchanges. They are the machines behind public equity economics, and deeply rewarding sources of trend analysis.
Stock exchange developments
Like most professions and industries, the world’s stock exchanges have their own club, or association — The World Federation of Exchanges. Like many associations, the WFE has transitioned from a benign support organization to an advocate for better industry practices. This is especially true of its sustainability efforts; the association works with virtually every stock exchange on the planet to evaluate sustainability performance, create change and engage with stakeholders.
This is a significant development in the sustainability field, especially if you consider the potential ripple effects:
The World Federation of Exchanges is the global trade association for exchanges and clearing houses. The WFE represents 64 public stock, futures and options exchanges, as well as CCPs, including those not affiliated with a single exchange. WFE promotes the development of fair, efficient and transparent markets. We work with policy makers, regulators and standard-setters around the world to support the development of effective rules and standards for exchanges and market participants.
Over 44,000 companies — representing a total market capitalization of $64 trillion, trading value of $76 trillion and equivalent to more than 75 percent of global GDP — list on WFE member exchanges.
The WFE formally launched its own Sustainability Working Group in March 2014 in order to "disseminate and foster best practices among member exchanges on sustainability." Some 20 months later, in November, the working group released its Exchange Guidance and Recommendations on sustainability. These guidelines help stock exchanges engage with their listed companies in the practice of measuring, managing and reporting on sustainability performance.
The working group is chaired by NASDAQ and made up of 25 stock exchanges from a wide array of economies and markets, including IntercontinentalExchange/NYSE, Deutsche Börse, Shenzhen Stock Exchange and the National Stock Exchange of India.
The shrewdness of this move is that it took its cue from global sustainability trends that already are shaping the markets, both on the buy and sell side. Investors everywhere are asking for reliable, material and comparable information — as are the leading reporting frameworks that many companies already deal with.
There was also overlapping involvement between members of the WFE’s Sustainability Working Group and the United Nations Sustainable Stock Exchange Initiative (SSE), which was established in 2009 and recently released the Model Guidance on Reporting ESG Information to Investors: A Voluntary Tool for Stock Exchanges to Guide Issuers.
Nevertheless, the WFE guidance goes further than the U.N. document, identifying a fair number of specific environmental, social and governance (ESG) indicators that exchanges should consider addressing with listed companies.
Appendices to the guidance tie each metric above to existing sustainability reporting frameworks — as well as a comprehensive list of stock exchange value drivers. There is also a summary of existing stock exchange sustainability practices, guidelines and (in some cases) listing rules.
Engaging the market
NASDAQ tries to lead by example. Many of its exchanges — especially those in the Nordics — frequently are ranked as the most transparent in the world on sustainable disclosures from listed companies. The parent company also documents its own Corporate Responsibility & Sustainability progress.
NASDAQ also initiated a webinar series to broadcast sustainability learning and expertise to listed companies and all other interested stakeholders. Episodes to date include:
- December 2014 (pilot) — The Transparency Triumph: Use existing systems to enhance operational awareness, track progress, and manage sustainability. Featuring Microsoft and NASDAQ’s own sustainability efforts, including supplier engagement techniques and strategies.
- March 2015 — Modern Due Diligence: How financial markets are analyzing and incorporating non-financial corporate performance data. Featuring Bloomberg, BlackRock and NASDAQ experts explaining how the markets are using sustainability information.
- June 2015 — Making Sense of Sustainability: Tips from the top non-financial reporting frameworks. Featuring experts from the leading reporting frameworks: Global Reporting Initiative (GRI), Sustainability Accounting Standards Board and The International Integrated Reporting Council.
- September 2015 — How Human Capital Impacts Corporate Financial Performance. Featuring experts from Harvard Law School's Labor and Worklife Program (Pensions & Capital Stewardship Project).
The next webinar in this series will be an end-of-year update on the state of the stock exchange developments, as well as a look at global sustainability trends through the eyes of the World Business Council on Sustainable Development.
Reading the tea leaves: Implications for companies
As these stock exchange initiatives unfold and as listed companies increasingly face market demands to measure, manage and report their own material ESG issues, a common pattern presents itself.
This is a pattern all companies should know and manage, if not leverage for business opportunities. We’ve seen it time and again: large, publicly traded multinational develops and implements a sustainability program; measures, manages and discloses its sustainability performance publicly for all stakeholders; recognizes the impacts, risks and opportunities in its supply chain; implements a supplier sustainability program and seeks some level of ESG disclosure from suppliers — both publicly traded and privately held suppliers.
One of the most interesting and forward thinking examples in this common pattern comes from Intel. A shareholder resolution from the New York City Comptroller sought greater disclosure from technology sector companies and their suppliers.
Intel took the initiative to invite 75 key suppliers to a sustainability training. Again, these were not just publicly traded companies, but privately held firms, and they were some of Intel’s biggest suppliers. Intel offered the suppliers a full two-day GRI Training course and had a captive audience of suppliers trained on how to identify, measure and report on their most material ESG issues.
Not only did this exercise benefit Intel’s own supply chain management interests, but it also helped the entire industry and other interested shareholders such as the New York City Comptroller. Public and private companies in the supply chain started reporting on sustainability publicly, which in turn helped those same suppliers address other customers who were asking similar questions.
Make demand a business advantage
What most sustainability professionals overlook is the immediate business case this supply chain ripple can have on their own sustainability interests. When a customer such as Intel asks suppliers to take action on sustainability, it creates a powerful business case and tangible reasons to support and enhance a sustainability program.
Whether public or private, large or small, some stakeholder will ask about your company’s sustainability efforts and ask for specifics about your overall ESG performance. In fact, a lack of public transparency on sustainability is increasingly triggering audits of suppliers.
As the stock exchanges increase their efforts and shareholders do the same, the top-down demand for transparency eventually will affect every company. This is even more relevant as an increasing number of public agencies — such as universities, cities, counties, states and nations — implement their own sustainability programs and begin to look at their supply chain.
The customer-supplier connection is the key to understand our collective global impact, as well as make our most powerful business case for sustainability. While privately held companies don’t have the same market pressures driving them to measure, manage and report on sustainability performance, they do have customers.
A look at the "point of sale" (whether shares of stock or goods and services) and mapping it to sustainability demands can help you make the strongest case, while also helping your company stay ahead of emerging compliance requirements.