Sustainable Stock Exchanges: The Relevance of Green Indices

NASDAQ’s Sandy Frucher

At the fourth Global Dialogue of Sustainable Stock Exchange (SSE) Initiative, last Tuesday in Geneva, Nasdaq OMX vice-chairman Meyer “Sandy” Frucher livened up discussions by spelling out a few hard-hitting truths. Though delivered in way that elicited chuckles from the participants, Mr Meyer reminded all present that green indices compiled by stock exchanges have so far failed to attract the attention of major investors: “No one trades on these green indices. Perhaps, investors are not yet wholly committed to sustainability values.”

Mr Frucher suggested that while most CEOs of listed companies are fully aware of the need for putting their businesses on a sustainable footing, they also know that investors seldom, if ever, ask about sustainability: “When CEOs brief analysts in quarterly conference calls, they are never grilled on the subject. Basically, nobody cares. Investors want returns and little else.”

The Nasdaq OMX vice-chairman also noted that institutional investors such as pension funds have a primary fiduciary obligation to those putting up the money. “Stock exchanges, now mostly private businesses, may need to shift their primary fiduciary obligation from investors to the investing public. This is what happened in Hong Kong and it’s a step in the right direction.”

“When CEOs brief analysts in quarterly conference calls, they are never grilled on the subject. Basically, nobody cares. Investors want returns and little else.”

– Sandy Frucher

Mr Frucher called for the creation of a global standard that clearly puts environmental, social, and governance (ESG) principles at, or near, the top of considerations as fundamental and material. “We need basic benchmarks against which to measure the impact of corporate operations on the wider society. From this starting point a thousand ideas will bloom.”

Mr Frucher praised the European Union for taking the lead with the introduction of its non-financial and diversity reporting directive which will mandate companies to disclose sustainability data. The directive is set to double the number of large companies that report such information. Mr Frucher expressed hope that the United States would follow suit but cautioned against expectations too great.

Richard Howitt, a member of the European Parliament for the East of England, was present in Geneva to explain the coming changes: “The new directive applies to companies with over 500 employees. In the EU there are about six thousand such companies and they will now have to regularly disclose information on environmental matters, social impact, human rights, workforce diversity, and anti-corruption policies.”

While Mr Howitt also recognised the urgency of formulating solid yet simple ESG benchmarks, he emphasised that much has already been accomplished: “With its new directive on the reporting of non-financial data, the European Union has not reached an end-point. It is now working on a shareholders rights directive and will continue to push for a strengthening of rules and regulations that improve sustainable business development.” Mr Howitt also said that the EU will focus on efforts to improve the quality of ESG reporting.

However, as Mr Frucher dryly noted in so many words: we like green, but like greenbacks even better. The main challenge facing the Sustainable Stock Exchanges Initiative is to make ESG best practices profitable and, as such, essential to a healthy bottom line.