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