Mukhisa Kituyi, UNCTAD: Sustainable Stock Exchanges and the 21st Century Challenge for Global Finance

Faced with common global economic, social, and environmental challenges, the international community is in the process of defining a set of Sustainable Development Goals (SDGs). As part of the United Nations post-2015 agenda, the SDGs will play a crucial role in catalysing efforts to address the most urgent priorities for the twenty-first century. Every institution, in every sector, will have a moral imperative to contribute to achieving the global goals. Stock exchanges and capital market regulators are gearing up to be part of the solution.

UNCTAD and its partners are working with policy makers and stock exchange executives around the world to promote more sustainable business practices and responsible capital markets. Launched in 2009 by UN Secretary-General Ban Ki-moon, the Sustainable Stock Exchanges (SSE) initiative is a joint project of UNCTAD, the UN Global Compact, the UN-supported Principles for Responsible Investment, and the UNEP-Finance Initiative. Since 2012 at the UN’s Rio+20 earth summit in Brazil, the SSE has invited stock exchanges to join by making a commitment to promote improved environmental, social, and corporate governance (ESG) disclosure and performance among their listed companies. Market giants like NYSE, NASDAQ, London Stock Exchange and Deutsche Börse, along with about a quarter of the major exchanges in the world, have joined the SSE and committed to working with the UN.

“At present, the financial markets are not hard-wired to drive capital towards sustainable business and the achievement of the SDGs. This can and should change.”

Momentum is building in this space. In a recent review of more than fifty stock exchanges worldwide, we find almost half of exchanges offer at least one index integrating social and/or environmental issues; nearly one-third of exchanges provide either sustainability reporting guidance or training to the listed companies on their exchange; and a small pioneering group of leading exchanges require comprehensive reporting of environmental and social issues for at least some, if not all of their companies [1].

This illustrates an emerging set of best practices among exchanges regarding the promotion of sustainability reporting and sustainable business practices more generally. The wider policy landscape is also supportive: 19 members of the G20 have at least one regulation in place requiring disclosure of social and/or environmental metrics by companies.

Securities regulators are also increasingly involved in the promotion of sustainability reporting. Of the 32 regulators represented on the board of the International Organization of Securities Commissions (IOSCO), for example, more than one-third have introduced a sustainability reporting initiative.

While these numbers show that a “new mainstream” is already emerging among policy makers, regulators, and exchanges, further progress is becoming even more urgent in light of the expected introduction of the SDGs in 2015. At present, the financial markets are not hard-wired to drive capital towards sustainable business and the achievement of the SDGs. This can and should change.

Obstacles to investment in sustainable development include: The failure of markets and investors to price negative social and environmental externalities; a lack of transparency on ESG performance; misaligned pay and performance incentives; and regulation and accounting standards that promote a short-term focus to the detriment of long-term sustainable development projects.

These obstacles could be overcome by, among other things, better alignment of corporate incentive structures, reporting requirements, and credit rating assessments with public policy goals. There is also potential to reform financial regulations and accounting standards, discourage short-term trading, and better integrate sustainability considerations into investors’ fiduciary duties and corporate governance practices. Integrating the reporting of ESG issues with financial reporting would also help align corporate performance with sustainable development objectives.

SSE Partner Exchanges
Stock Exchange of Thailand (SET)	Thailand
Deutsche Börse	Germany
Jamaica Stock Exchange (JSE)	Jamaica
Lima Stock Exchange (BVL)	Peru
Mexican Stock Exchange (BMV)	Mexico
Stock Exchange of Thailand (SET)	Thailand
Colombian Securities Exchange (BVC)	Colombia
London Stock Exchange (LSE)	UK
Warsaw Stock Exchange (WSE)	Poland
Nigerian Stock Exchange (NSE)	Nigeria
Bombay Stock Exchange (BSE)	India
NASDAQ OMX	USA
BM&FBOVESPA	Brazil
Johannesburg Stock Exchange (JSE)	South Africa
Borsa Istanbul	Turkey
Egyptian Exchange (EGX)	Egypt

Sustainability reporting plays an important role in providing the tools that will be needed to implement the sustainable development goals. High-quality corporate reporting on the environmental and social issues that businesses face can help identify targets and measure progress. Such reporting can play an important role in driving investment to sustainable business practices, financing the sustainability outcomes that the world seeks.While some of these broader challenges lie outside their remit, capital market policy makers and stock exchanges have practical options at hand today to promote sustainable business. Guidance produced by UNCTAD, for example, offers suggestions as to how exchanges and policy makers considering sustainability reporting initiatives might proceed [2]. While recognizing that there is no “one-size-fits-all” solution, the guidance considers which institutions might be best placed to introduce sustainability reporting initiatives, and the regulatory and competitive landscape in which exchanges find themselves. It also considers what might be included in the policy, what model of disclosure might be pursued, and how exchanges and regulators might best implement a reporting policy.

Stock exchanges around the world continue to join the SSE initiative as Partner Exchanges to work on these practical measures – to share experiences, overcome common challenges, and engage with key capital market stakeholders. The SSE has seen its membership triple from its original five members to fifteen in just over two years. At the time of press, more than 16,000 companies, with approximately $36 trillion in market capitalization, are listed on SSE Partner Exchanges. We will continue to reach out to stock market stakeholders – policy makers, exchanges, investors, and companies – to help them further promote alignment between market signals and much needed public policy goals. That’s the 21st Century challenge for global finance.

References
[1] SSE (2014) Sustainable Stock Exchanges 2014 Report on Progress forthcoming.
[2] UNCTAD (2014) Best Practice Guidance for Policymakers and Stock Exchanges on Sustainability Reporting Initiatives.