Stock exchanges urged to make ESG demands

There are increasing calls for stock exchanges to become more involved in  efforts to encourage the companies that list on them to consider more seriously  environmental, social and governance issues.

“It is part of their job and they do not do enough,” says Jon Williams, a  partner in the Sustainability and Climate Change practice at PwC.

Partly, this is due to their structures: many of the biggest bourses are now  listed companies themselves, under pressure to generate returns for their  shareholders. “Exchanges make money through volume. The best thing for their  business is volatility,” Mr Williams says. “It is all part of the short termism  that pervades the financial markets.”

However, exchanges also have a utility function that goes far wider than  their own shareholders – and that is to help provide sustainable capital markets  that are more resilient than they proved to be during the financial crisis.  Steve Waygood, head of sustainability research and investment at Aviva, says: “If we do not have capital markets structured in a sustainable fashion, we  cannot ensure that the cost of capital is higher for unsustainable behaviour. It  is the responsibility of exchanges to promote responsible investment and  corporate behaviour via disclosure.”

An increasing number of exchanges seem to agree. A recent report* from the  Sustainable Stock Exchanges Initiative surveyed 27 of the world’s biggest  exchanges and found 76 per cent thought they had a responsibility to encourage  greater corporate responsibility. However, they were also quick to point out  there was no money in this for them and that, “in an increasingly global and  competitive market and with a reduced regulatory function, there are limits to  the actions they can take on sustainability”.

“The most obvious tool they can use is their listing requirements.”

There is nothing to stop exchanges from requiring certain disclosures of ESG  practices, or saying that companies must put their sustainability report to the  AGM alongside the financial report,” PwC’s Mr Williams says.

“Aviva does this and it forces them to treat it with the same rigour as the  annual report.”

A growing number of exchanges are introducing sustainability-related  requirements on a comply-or-explain basis, but it is notable that the prime  movers are in emerging markets. “Emerging markets see sustainability as helping  to bring the overall standard of performance up for them and the companies that  list on them,” says Thomas Kuh, executive director for ESG indices at MSCI. “Developed markets are at best passive in this area.”

At NYSE Euronext, for example, Michelle Greene, head of corporate  responsibility talks about “celebrating the good work of companies leading on  sustainability, highlighting what they are doing and allowing others to learn  from best practice. Our approach is more carrot than stick.”

Meanwhile, the LSE directs inquiries about sustainability and ESG matters to subsidiary FTSE, which runs the  FTSE4Good indices. While these are valuable for investors looking to invest in a  best-in-class sustainability strategy, “large investors buy the whole market,  not a subset”, says Mr Williams, meaning there is a need for measures that  improve the performance of all companies.

Emerging market bourses are taking a more proactive approach, with exchanges  in South Africa, Brazil and Malaysia among those that require companies to  publish sustainability reports or explain why not.

In South Africa, where the JSE has incorporated the King Code of Corporate  Governance into its listing requirements, Michelle Joubert, head of investor  relations, says: “As an exchange in a developing country, it is incumbent on us  to ensure the development of communities and consumers.”

“That encourages the growth of the economy and the companies listed on the  JSE. If we don’t play a role in encouraging our companies to think about  sustainability issues, we’re not doing our job.”

This is particularly important for South Africa, not just because of its  apartheid past and the social issues that has created but also because of the  predominance of mining and extractive companies on the JSE and in the country’s  economy.

BM&F Bovespa also stresses the importance of Brazil’s natural resources  as a reason for its focus on sustainability.

“Emerging markets do not have the burden of the old economy that Europe and  North America have,” says Mr Williams.

“They want to create exchanges for the new economy while the make-up of the  LSE, for example, is very carbon- and resource-heavy. It would be a real shame  if, at a time when the world is moving to a lower-carbon, lower-energy model,  London were to find itself excluded from that new economy.”

The Sustainable Stock Exchange Initiative is calling on policymakers and  regulators to support the introduction of guiding principles to enhance ESG  disclosure by companies in their markets, something supported by 80 per cent of  respondents to the survey.

The initiative wants to see all nations at Rio+20  commit “to develop a convention requiring on a report or explain basis the  integration of material sustainability issues within the report and accounts of  all listed and large private companies”.

*Sustainable Stock Exchanges: Real Obstacles, Real Opportunities