November 04, 2009
Role of Stock Exchanges on Corporate ESG Disclosure Gains Traction
by Robert Kropp
Reports from the World Federation of Exchanges and EIRIS coincide with UN meeting on how stock
exchanges can encourage responsible investment.
The potential role of stock exchanges in promoting corporate transparency on environmental, social,
and governance (ESG) issues gained overdue prominence in recent days, when a meeting was held at
the UN on November 2 in which institutional investors and CEOs of stock exchanges explored how they
might work together with regulators and business to encourage responsible long-term approaches to
The meeting at the UN was co-hosted by the Principles for Responsible Investment (PRI), the UN Global Compact, and the United Nations Conference on Trade and Development
An attendee at the meeting was Aviva Investors, a UK-based asset management company,
which called on "stock exchanges around the globe to more actively promote corporate responsibility
and transparency among the companies that are listed on exchanges."
In October, the World Federation of Exchanges (WFE)
issued a report entitled Exchanges and Sustainable
Investment, in which the trade association of 53 publicly regulated stock, futures, and options
exchanges surveyed its members to "help share experience and ideas within the global community of
exchanges, and to raise awareness amongst market participants, regulators and other external
Identifying climate change and the transition to a low-carbon economy as
key drivers of the entry into mainstream investment of the priorities of socially responsible
investors, the report asks, among other issues, "How can exchanges help to shape the way that
regulatory conditions and reforms facilitate ESG transparency and sustainable investment flows?"
The report describes the categories in which responsible investment initiatives by
exchanges are currently engaged. In addition to raising awareness and standards of ESG issues among
listed companies, exchanges have developed products and services for sustainable investors,
included markets for specific sustainable investment niches.
SocialFunds.com spoke with
Dan Siddy, Director of Delsus Limited, an
environmental, social, and governance (ESG) consulting and advisory firm, who is the author of the
"Exchanges in emerging markets have been doing a tremendous amount in
addressing market quality, corporate governance, and social issues," Siddy said. "In developed
markets, the initiatives that exchanges take are mainly training instruments that investors can
use. Sustainability indexes are one example of this, and others are environmental exchange-traded
funds (ETFs) and carbon markets."
"Exchanges in developed markets are also competing for
listings of clean tech companies," he continued.
The WFE report contains a wealth of
information about initiatives taken by exchanges worldwide to address ESG issues. In Australia, for
instance, the Australian Securities Exchange recently revised its Corporate Governance Principles
and Recommendations to require listed companies to disclose the extent to which they have followed
recommendations on the oversight and management of material business risks, including ESG issues.
Companies that fail to follow the recommendations must disclose why they have not.
Regarding the Green Securities and Green IPO policies launched by the Ministry of Environmental
Protection in China, Siddy said, "The China example is totally unique, with its green IPO policy."
The Chinese Green IPO policy requires companies in 14 energy-intensive industries to undergo an
environmental assessment before initiating an IPO or obtaining refinancing from banks.
Siddy said of some of the other initiatives undertaken by exchanges in emerging markets, "In
Brazil and South Africa we're seeing some products and services being developed. On corporate
governance and social issues in Brazil, the Sao Paulo Stock Exchange has had a big impact, raising
standards among issuing companies and increasing investor confidence."
Examples of indexes
launched by exchanges in Brazil and South Africa are the Bovespa Corporate Sustainability Index in
Brazil, and the JSE SRI index in South Africa.
The report found that "developed market
exchanges are focusing primarily on investable indexes which can be licensed to tracker funds or
customized to client's specific requirements." Products include broad-based indexes that use ESG
criteria for selecting companies, such as the FTSE4Good index series, and sector-specific indexes
that focus on companies engaged in clean technology, sustainable energy and environmental services.
A third category of product was issued by NYSE Euronext this year, when the exchange
launched a broad-based index based on the single ESG issue of climate change. The NYSE Euronext Low
Carbon 100 Europe Index measures the performance of the 100 largest European companies having the
lowest carbon intensity in their sectors.
In general, Siddy said, "Stock exchanges have
been deeply involved with national regulators in discussions about regulatory reform, and the WFE
has been closely involved in pushing for development of better accounting and auditing standards."
Coinciding with the meeting at the UN was the release of another report, from EIRIS, a global provider of research into
corporate ESG performance. The EIRIS Report on Sustainable Stock Exchanges found that as businesses
in their own right, more than half of stock exchanges achieved less than average scores in managing
their own ESG impacts.
On the other hand, EIRIS found that "stock exchanges have already
started playing a role in promoting better ESG disclosure through IPO and listing requirements in
The recommendations provided in the EIRIS report include the
implementation of ESG disclosure requirements into listing rules and corporate governance
At the UN meeting on Sustainable Stock Exchanges, Paul Abberley, CEO of Aviva
Investors, said, "Our main focus is on promoting a global listing environment that requires
companies to consider how responsible and sustainable their business model is. Direct opportunities
to vote at company Annual General Meetings on corporate responsibility reports are almost unheard
of. I am strongly of the view that amending specific market listing codes in this way has the
potential to make capital markets substantially more sustainable."
But according to Siddy,
who attended the meeting, "One of the challenges is that asset owners and managers need to have a
better understanding of the business models of exchanges. Aviva was calling for exchanges to issue
listing rules, but the regulatory powers of exchanges are limited. If you're going to have rules,
you have to be able to enforce them. Understanding what exchanges can do on ESG issues is
"One of the key things that came out of the UN meeting is that many asset
owners and managers had not been aware of the full range of activities by the WFE," Siddy
continued. "Some asset owners seem to think that stock exchanges are part of the cause of lack of
transparency on ESG disclosure, but you can't look at that in isolation from such things as
Furthermore, Siddy said, "Discussion about ESG is part of the
larger issue of financial stability. We've seen a lot of input from investment banks, but little
from asset owners on the broader aspects of transparency and disclosure."