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November 18, 2013
Sustainable Stock Exchanges can Influence Corporate ESG Performance
    by Robert Kropp

EIRIS publishes results of interviews with 11 stock exchanges and finds that helping investors engage with companies on sustainability issues is a key motivating factor.


After years of determined advocacy for corporate sustainability reporting by sustainable investors and other stakeholders, it's disheartening to be reminded that only three percent of the world's largest companies report on what Corporate Knights defines as the first generation of sustainability indicators.

The seven indicators, according to Corporate Knights, include “employee turnover, energy, greenhouse gases (GHGs), lost-time injury rate, payroll, waste and water.”

“Stock exchanges—and policymakers of all description—that are considering implementing a sustainability disclosure policy would be well-advised to structure it as a mandatory, prescriptive and broad instrument,” Corporate Knights stated. “Mandatory policies impose reporting obligations on affected companies.”

“Stock exchanges have hitherto played a relatively minor role in the development of sustainability disclosure policy, although their potential role is recognized to be hugely significant,” the report continues.

A second report, issues recently by EIRIS, surveys 11 global stock exchanges “about their motivations for implementing sustainability initiatives, the challenges that they have faced in the course of implementation and any insights that they can share with other stock exchanges.”

One of the challenges reported by exchanges operating in a competitive environment was the ease with which companies can move “to an alternative exchange if they found listing requirements on one exchange to be too onerous.” NASDAQ, a member of the Sustainable Stock Exchanges initiative, told EIRIS, “Our market is more competitive...we’re a little more reticent to jump out in front of this by ourselves.”

However, Corporate Knights found “sparse evidence to support this perceived negative trade-off, indicating more research in this area is urgently required.”

One means of easing the burden of sustainable stock exchanges in competitive environments, EIRIS found, is proactive involvement by national security regulators. For example, the report cites the experience of the Bombay Stock Exchange in India, which told EIRIS, “The regulator has an important role in places like India where there are multiple exchanges because it’s hard for us to impose a unilateral disclosure requirement that’s new on companies... We can’t do that without it being a requirement on all exchanges, otherwise it may become a regulatory arbitrage.”

In the US, on the other hand, regulators have done little to encourage sustainability reporting by companies. According to NASDAQ, regulators “are the ones who should be outside of the market place, looking at the kind of pressures that good and bad ESG can have on the market place, on price movement, on company sustainability, on investor right to know a certain piece of information. I think that they are the ones who are probably best suited to make those kind of analyses, and they certainly have the guidance and expertise to do so, but for one reason or another, I’m not sure why, it hasn’t happened.”

EIRIS works with a number of stock exchanges and has helped exchanges in South Africa, Brazil, and Mexico develop sustainable stock indexes. Based on its experience and the interviews, the firm concluded its report with the following recommendations for exchanges:
• engage with companies and investors around the long-term benefits of driving better company performance on ESG issues, both for the benefit of these groups and for society as a whole;
• engage with investors, particularly those from the mainstream, in order to identify the sustainability-focused products and services that exchanges can offer which would be of most value to investors;
• explore ways of working together to overcome the challenges stock exchanges face;
• work with national regulators to develop ESG-related listing rules, preferably on a ‘comply or explain’ basis;
• encourage companies to provide audited ESG data; and
• draw on the latest research to support the link between long term financial performance and ESG issues.

 

 
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