Evan Harvey, Nasdaq: Emerging Markets Leverage ESG Strategy

sOver the last decade, emerging market exchanges (EMEs) have outperformed the rest of the world in a few key ways related to sustainability performance and disclosure. The primary markets in two emerging economies – South Africa’s Johannesburg Stock Exchange (JSX) and BM&FBOVESPA in Brazil – feature the longest-standing and most rigorous sustainability disclosure requirements from their listed companies.

“Smaller companies listed on EMEs (indeed, smaller companies listed anywhere) face a disproportionately difficult burden in complying with these rules.”

The impulse to make institutions more transparent and responsible emerged from South Africa’s difficult historical legacy and the good governance mandates of the King Code. JSX companies are not only required to disclose ESG practices, but they must do so in an integrated report, which merges financial and non-financial metrics into a unified narrative for investors and regulators. Brazilian companies that list on BM&FBOVESPA are “obliged to provide information on an annual basis that ranges from board practices to risk management policy, and the main risk factors that impact the organisation,” according to its rules.

The Business Case for Doing More (or Less)

Why have EMEs been so progressive on this topic and nimble in their execution? For one thing, EMEs tend to have less legacy regulation to work through and fewer corporate relationships to manage. This is not always the case – the two major exchanges in India, Bombay and NSE, have managed to implement good sustainability disclosure requirements despite listing thousands of companies – but seems to be generally true. Perhaps the lack of other capital-raising options ensures a steady supply of local IPOs, no matter how restrictive their rules are. Larger exchanges in competitive (and developed) markets must always hedge against overregulation, lest private companies follow the path of least resistance when navigating their public offering.

“It’s no secret that EMEs leverage ESG to entice investors, especially those from abroad, and promote more liquidity in their market. In the early stages of development, these are essential virtues.”

There are solid business drivers behind this. It’s no secret that EMEs leverage ESG to entice investors, especially those from abroad, and promote more liquidity in their market. In the early stages of development, these are essential virtues. But not everyone benefits equally from a strong disclosure regimen, at least in the short term. Smaller companies listed on EMEs (indeed, smaller companies listed anywhere) face a disproportionately difficult burden in complying with these rules. They often lack the resources or expertise to integrate ESG strategy and report on performance.

Many believe that exchanges may be overstepping their bounds in asking for this kind of data. In the two examples cited, the exchanges have close operational ties to the government or a local market regulator which means that their goals are aligned. But many other exchanges are not as closely tied to such regulatory controls, and perhaps threaten encroachment on territory best left to impartial experts.

Emerging Market Exchanges: Four Examples

The Korea Exchange does not require comprehensive sustainability reporting in its listing rules, but there are other drivers behind better corporate disclosure in that market. The South Korean government has issued environmental risk and evaluation guidelines for companies, based on the Global Reporting Initiative (GRI) standard but localised to focus on Korean business issues. More broadly, the Financial Services Commission issued a requirement in 2012 for the top 500 firms to disclose energy consumption, emissions, and sourcing data. Korean insurance companies, in particular, are required to report on their social and philanthropic activities. The Korean Exchange also has an index that includes about 70 listed companies with the highest overall ESG ratings.

There are two primary stock exchanges in mainland China – Shanghai and Shenzhen – and they both have taken progressive approaches to corporate ESG disclosure. Shanghai implemented a rule in 2008 that requires all listed companies to annually disclose environmental strategy and performance metrics. The Shanghai Stock Exchange also provides sustainability guidance, education, and outreach to its listed companies – as well as a small handful of related index products.

Shanghai does not specifically address the disclosure of much social or governance data, but Shenzhen does. Its reporting guidance, which originated in 2006, asks listed companies to address “social development, building social harmony, accelerating sustainable economic and social development, and promoting commitment to social responsibilities.” Furthermore, the guidance addresses specific social issues, such as supporting employee interests, improving occupational health and safety, equal pay, anti-discrimination and anti-corruption efforts.

Bursa Malaysia takes a comply-or-explain approach to corporate sustainability reporting. Companies are asked to disclose CSR activities and practices (covering the environment, marketplace, workplace, and community) or a detailed explanation as to why they are unable to do so. The exchange also created, in 2010, a rigorous education programme that educates public company management and directors on key sustainability issues and how they impact the bottom line. An online resource, called the Sustainability Knowledge Portal, provides reporting framework guidance, corporate case studies, and localised tax-incentive strategies.

A Complex Portrait

Many investors, even those with a deep appreciation for the entire ESG spectrum, believe that governance controls may be the best long-term predictors of corporate value and performance. So if EMEs are able to create a culture of outperformance in that area, the money would likely flow their way. And as the above summary illustrates, many markets have come to appreciate the value and necessity of better environmental reporting and performance from corporations; they are both sickness and cure in the quest to combat climate change.

Where does this leave social controls, such as human rights, diversity and inclusion, fair labour practices, and so on? Lack of corporate social controls will not only affect EMEs, but (via global supply chains) the much larger markets in developed economies where the largest companies list.


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.

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