Evan Harvey, Nasdaq: Stock Exchanges, European Capital Markets, and Sustainability
Sustainability is already part of the global market ecosystem. Exchanges and regulators have embraced it, researchers and academics have validated it, and the law in many places already requires it. Even if the perspective remains limited to the US Supreme Court’s definition of materiality or SEC disclosure guidance, sustainability data is likely part of the total mix of information that investors require.
As listing venues, stock exchanges do everything possible to support their issuers, provide them with access to long-term capital, and help them grow their business. They have no desire to simply pile new requirements on top of old ones, even if it results in better sustainability data flows. But exchanges also have more far-reaching obligations. To be sure that the interests of many different market participants are fairly represented, exchanges are working together to create change in their industry.
The Sustainable Stock Exchanges (SSE) initiative is an UN-backed project, exploring how exchanges can collaborate with investors, regulators, and companies to enhance corporate transparency, and ultimately performance, on environmental, social and corporate governance (ESG) issues. It is dedicated to finding ways to encourage responsible, liquid, and long-term investment.
“The Helsinki Exchange was also the first exchange in the world to receive a WWF Green Office diploma, and one of the first in the world to go carbon neutral.”
Another effort comes from the World Federation of Exchanges, which is the only trade association binding virtually all of the world’s stock exchanges together. Their Sustainability Working Group (SWG) has been embarked on a two-year quest to determine the material need (if any) for exchanges “to seek, standardise, and/or publish environmental, social, and corporate governance (ESG) data.” The SWG has been scouring traditional sustainability data disclosures and reporting frameworks for fresh insights. Its group members are tasked with interpreting the real impacts of exchange intervention, both positive and negative, on their business.
But because several kinds of exchanges participate in this group – and make up the membership rolls of the WFE – it does not limit its investigation to the ESG disclosure space. This group also considers sustainability indexes and financial instruments, energy futures and commodities, and the larger role that exchanges as financial engines can play in the formation and sustenance of a fair, open, and transparent national economy.
Three Leading European Exchanges
These projects are made up of multiple exchange participants from a diverse array of economies and markets. European participation is an integral driver. Five of the nineteen exchanges in the SSE, for example, represent European markets.
Deutsche Börse (DB), an active member of both the SSE and SWG, makes its case for corporate transparency directly to issuers. DB provides detailed sustainability reporting guidance (the ESG Practice Guide) to all of its listed companies. The reasons for doing so are deeply rooted in investor concerns: “ESG information goes beyond a company’s financial figures to show an additional facet of the company in question and is therefore significant to its well-founded evaluation and reliable assessment of the risk/return profile of an investment.”
DB has publicly signalled its support for the Global Reporting Initiative (GRI), the German Sustainability Code (GSC), and the International Integrated Reporting Council (IIRC). It provides thorough training on sustainability issues, ranging from capital market communication strategies to specific ESG reporting frameworks. The exchange has created a number of sustainability-based indexes as well.
In some notable cases elsewhere (South Africa, Brazil, and Singapore), exchanges have simply mandated sustainability disclosures as part of their listing rules. Listing rules at the London Stock Exchange (LSE), however, are set by the regulator – not the exchange. The UK market has better corporate disclosures (thanks to the 2013 debut of the Companies Act) for greenhouse gas emissions, human rights, and diversity performance. Companies must now disclose those metrics in annual reports.
The LSE has organised seminars and other events on best practices in ESG disclosure for corporate audiences, in collaboration with established partners like the Carbon Disclosure Project and the IIRC. FTSE, which is owned by the LSE Group, provides some of the oldest and most detailed ESG ratings and data to the global investment community. FTSE also works with asset owners, asset managers and banks to develop specialized ESG services.
A 2014 Corporate Knights study, which measured corporate disclosure of first-generation sustainability indicators, put the Helsinki Exchange (part of the Nasdaq OMX Group) at the top of the list. “No stock exchange in the world,” the authors of the study concluded, “comes close to the Helsinki Stock Exchange when it comes to the proportion of large listings disclosing quantitative sustainability data.”
The Helsinki Exchange was also the first exchange in the world to receive a WWF Green Office diploma, and one of the first in the world to go carbon neutral. It has continued to maintain its carbon neutral status for several years in a row. It has also been a member a member of the Finnish Business & Society Ry (FiBS) since September 2011.The FiBS enterprise network was established in 2000 to specifically promote financially, socially, and ecologically sustainable business in Finland.
The Far Reach of European Regulators
It’s not just exchanges that are making significant headway. European regulatory moves are not only part of the global discussion; they are driving compliance measures in non-European markets. The European Union (EU) Council adopted a new directive in 2014, establishing guidelines for non-financial disclosure by companies with 500 or more employees.
This directive imposes a comply-or-explain obligation on its corporate targets, asking them to disclose “existing policies on environmental, social, employee, human rights, anti-corruption, and bribery matters, including a description of the outcomes of their policies, relevant non-financial key performance indicators, and main risks related to these matters. Companies which do not pursue policies for these matters will have to provide a clear and reasoned explanation for their choice.”
More than 6,000 companies both inside and outside the EU are apparently subject to the directive.
Sustainability vs. Short-Termism
Preparing detailed reports is nothing new for public companies. They must constantly research, publish, and defend repetitive financial disclosures. Analysts and investors draw meaningful inferences (and make economic decisions) based on quarterly achievements or setbacks. This unrelenting pattern churns data every quarter without offering real or enduring insight – and it sometimes prohibits companies from engaging the public on longer-term strategies.
Stock exchanges see this dynamic played out every day. Sustainable capital formation starts with informed investment decisions, because they tend to produce longer-term investments. Providing investors and other stakeholders with a better understanding of key performance metrics makes markets more transparent, efficient, and sustainable.
Comprehensive and common-sense disclosure of even a small number of sustainability metrics can propel businesses to better plan and execute long-term strategy. In theory, this offsets any resource or cost burdens related to developing expertise in sustainability management.
Simply getting more corporate data into the system may not suffice; there must also be an eventual shift of focus from reporting to performance measurement. But better data access (and more harmonised structure) will lead to better analytical research and modelling of shareholder returns, rates of turnover, and so on.
ESG screens are now part of equity strategy, but also increasingly essential to fiduciary oversight.
About the Author
Evan Harvey is the Director of Corporate Responsibility for Nasdaq. He also serves on the Board of Directors for the UNGC US Network and chairs the Sustainability Working Group at the World Federation of Exchanges.