April 19, 2013
INCR Propose Listing Standards for Stock Exchanges
by Robert Kropp
Drawing upon dialogues with NASDAQ and other stock exchanges, INCR produces a consultation paper
recommending the integration of sustainability disclosure requirements into listing rules.
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
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
environmental, social, and corporate governance (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.com 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
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 my 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 exchanged 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 (KPIs) 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
• Employee relations
• Environmental impact
• Government relations
• Human rights
• Product impact and
• Supply chain
INCR welcomes comments on its proposals until May 1st.