On the 4th of November 2015, the Chair of the World Federation of Exchanges‘ (WFE) Sustainability Working Group (SWG), Evan Harvey, publicly announced the release of the latest WFE recommendation on ESG reporting. The document capitalised and reinforced the use of the Sustainable Stock Exchanges (SEE) Initiative Model Guidance released two months earlier. The SEE has been established as a learning platform for reviewing the way in which exchanges work with regulators, investors, and companies, to promote responsible investment through better transparency and increased ESG performance. The WFE recommendation, launched back in 2015, was to offer ‘practical advice on how to roll-out enhanced sustainability disclosure’, a tool to help concretely the signatories to the UN backed SSE. Stock exchanges are an indispensable player and a key actor of the financial system. They are able to help business, stimulate growth, create jobs, while connecting diversified players through their interconnected networks. They are at the forefront of regulatory changes, innovation and standards. Their role is increasingly recognised and so is their potential for driving change. This week, the WFE launched an update on its 2015 Guidance and Metrics, to include some of the latest advancements around disclosure in the last few years.
Even prior to 2015, the international investor community had started to rally for stock exchanges to encourage companies to take environmental, social, and governance (ESG) criteria more seriously. Although they are extremely well placed to do it, their own structure (some of them are now listed companies) does tend to complicate things. These players are faced with pressure to generate returns, hence their appetite for greater volumes. Nevertheless, they have been able to pave the way in sustainability as in many other fields and, in the absence of incentives, stock exchanges have started on the path by including sustainability
as part of their listing requirements. The first movers in this space have been coming from emerging markets, where sustainability is seen as a way to raise the bar on the standard of performance, for all the actors involved in the financial system. In South Africa, Brazil, and Malaysia, stock exchanges have been requiring companies to publish sustainability reports for a number of years. Providing greater disclosure provides better insight into operational risks for investors as well as companies. Asking for ESG reporting ensures that an important category of risk is taken into consideration by companies and at the same time, these risks become material even for those investors that were not considering ESG in the past. It’s a win-win for stock exchanges, which can use sustainability standards to boost investor confidence, while raising their profile and the one of issuers.
Today, the initiatives are growing in number, and stock exchanges in many instances are not content with ‘just’ issuing guidelines, but take their responsibility to the next level. For instance, the NASDAQ’s Nordic and Baltic exchanges in Stockholm, Helsinki, Copenhagen, Iceland, Tallinn, Riga, and Vilnius, issued a voluntary support program on ESG disclosure last year, to support their listed companies. Nasdaq Nordic embarked on this initiative in order to fulfil its commitment to the United Nations Sustainable Stock Exchanges (SSE) initiative’s Campaign to Close the ESG Guidance Gap. This is also in line with Sustainable Development (SDG) goal 12, target 6: ‘Encourage companies, especially large and transnational companies, to adopt sustainable practices and to integrate sustainability information into their reporting cycle’, which builds into the main objectives of the work of the SEE and its signatories.
In a nutshell, stock exchanges can do a lot to advance sustainability through requiring transparency, guiding companies, and giving more information to investors. Further collaboration among them is encouraged to boost commonality and help diminish the level of confusion, which still very much pervades the industry today, with regards to what sustainability requirements are and should be. There is still much work needed to bring about a good level of alignment in the financial industry.
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