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January 06, 2015
Report Calls for Climate Resilient Stock Exchanges
    by Robert Kropp

Arguing that risks associated with climate change are increasingly likely to destroy value, the Climate Disclosure Standards Board calls on stock exchanges to mandate corporate reporting that includes climate risk assessments.


Evidence of climate change is “unequivocal,” as a report published last month by the Climate Disclosure Standards Board (CDSB) begins. Also unequivocal is the fact that not nearly enough is being done to construct a climate resilient society.

The CDSB report notes that private investment is critical for building climate resilience, but investors insist that a greater degree of certainty is needed for the scale of investment required. One important source of information would be consistent corporate reporting on the possible impacts on business operations of climate change, and to that end the Securities and Exchange Commission issued interpretative guidance governing corporate climate change reporting.

Unfortunately, as Ceres reported early last year, “Most S&P 500 climate disclosures in 10-Ks are very brief, provide little discussion of material issues, and do not quantify impacts or risks.” Furthermore, Ceres continued, “Forty one percent of S&P 500 companies did not include any climate related disclosure at all in their 10-K filings in 2013.”

According to CDSB, “Stock exchanges have a powerful role to play in protecting stock market actors,
creating the conditions for low-carbon investment and promoting incentives for the development of
practices that protect natural resources and strengthen climate resilience.” A number of the world's exchanges do address climate change proactively already, in that they either “require or encourage” listed companies to disclose relevant environmental information.

An increasing number of exchanges are developing sustainability indexes as well, “to identify companies that meet certain sustainability standards or subsets thereof.” In November, for example, EIRIS reported that Borsa Istanbul launched the BIST Sustainability Index, the first sustainability index in Turkey. “The BIST Sustainability Index methodology is based on ESG criteria including biodiversity, climate change, environment, human rights, health and safety, bribery and board practice,” EIRIS stated.

Also, networks of exchanges such as the Sustainable Stock Exchanges (SSE) provide forums for enhancing corporate transparency.

But as CDSB reports, “Although some stock exchanges are engaging in and leading environmental, climate change and sustainability reporting, there are various challenges to be addressed before those actions result in optimal outcomes for financial market actors.” Yet historically, stock exchanges have intervened in cases of financial stability and corporate governance; the same approach, CDSB argues, can be adapted for addressing climate change as well.

Since, as last year's report from Ceres demonstrates, too many corporations are failing to comply with voluntary measures such as the SEC's interpretive guidance, the solution arrived at by CDSB is mandatory reporting. The report concludes with a comprehensive description of what form such reporting might take; as well-tested models such as the CDP have been refined over a period of many years, such a transition should not be onerous to corporations that have thus far resisted reporting as a voluntary measure.

“In the same way that they have responded decisively to corporate governance irregularities and to the
financial stability agenda, stock exchanges are starting to respond to the new risk landscape presented by climate change,” the report concludes. “The infrastructure and leadership is in place for stock exchanges to build on the progress they have already to support and introduce climate change reporting requirements.”

 

 
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