5.4.1 Is harmonization of sustainability listing requirements on the way?

Although markets are widely divergent, we are starting to see convergence among stock exchanges. The discussion of the potential benefits of standardized ESG disclosures has reached to the stock exchanges. A number of stock exchanges have shown their interest in responsible investment and have joined the UN-affiliated Sustainable Stock Exchanges Initiative (SSE) to promote responsible investment policies and practices.1 In 2015 there were 24 stock exchanges part of the Sustainable Stock Exchanges initiative.2 The Sustainable Stock Exchanges initiative is co-organized by the United Nations Conference on Trade and Development (UNCTAD), the UN-supported Principles for Responsible Investment, the UN Global Compact and the UN Environment Programme – Finance Initiative (UNEP-FI). It is also a volunteer peer-to-peer learning platform for exploring how exchanges, in collaboration with investors, regulators, and companies, can enhance corporate transparency – and ultimately performance – on ESG risks and encourage responsible investment. The Sustainable Stock Exchanges was named by Forbes magazine as one of the “World’s Best Sustainability Ideas” and was a finalist for the 2011 Katerva Sustainability Award.3 Forbes magazine named the Sustainable Stock Exchanges initiative as one of the “world’s best sustainability ideas”. Created by the United Nations in 2009 it is an initiative aimed at exploring how exchanges can work together with investors, regulators and companies to enhance corporate transparency, and ultimately performances, on environmental, social and corporate governance (ESG) issues and encourage responsible long-term approaches to investment.4 The Sustainable Stock Exchanges’ influence has grown both within and beyond its membership. The World Federation of Exchanges have conducted surveys amongst its members revealing that the number of stock exchanges providing sustainability-related training to companies and investors has multiplied between 2010 and 2014, while the number of exchanges requiring or encouraging social and environmental reporting has increased fivefold (Responsible Research, 2010, 2012; UNCTAD, Principles for Responsible Investment, The Global Compact, & UNEP Finance Initiative, 2014).5

On a mandatory level the NASDAQ OMX stock exchange and the CERES-led Investor Network on Climate Risk are teaming-up in a pioneer initiative to develop a uniform standard for the consistent integration of ESG data disclosure into the listing requirements for all stock exchanges worldwide.6 This initiative is meant to trigger the implementation of standardized ESG disclosure among global stock exchanges. The Investor Network on Climate Risk’ Listing Standards Drafting Committee was created in 2012 to develop a consultation paper seeking investor comments on potential ESG listing requirements.7 More than 100 investors provided comments to the consultation paper which resulted in the Investor Listing Standards Proposal: Recommendations for Stock Exchange Requirements on Corporate Sustainability Reporting, submitted to NASDAQ OMX on the 8th of April 2013.8 In recognition of the essential role of ESG information to the investment process, the proposal provides disclosure flexibility to companies and provides investors with consistent information for helping them with evaluating ESG risks and opportunities in their investment decision process. Three items of ESG disclosure are proposed, i) a materiality assessment in annual financial filings where management will discuss its approach to determining the company’s material ESG issues; ii) ESG disclosure, on a “comply or explain” basis, on 10 key ESG topics in the format and location of the company’s choosing; iii) a hyperlink in annual financial filings to an ESG Disclosure Index (table), based on the Global Reporting Initiative (GRI) Content Index or its Equivalent, indicating where existing ESG information can be found.

The Investor Listing Standards Proposal was submitted to the World Federation of Exchanges in March 2014.9 After which the CERES and the World Federation of Exchanges collected feedback from more than 60 exchange members through a survey of exchanges’ best practice on sustainability around the world and presented the results to the consideration of the World Federation of Exchanges Sustainability Working Group in September 2015.1011

Following the World Federation of Exchanges’ survey of sustainability policies mentioned above in 4.1 a), through the Sustainability Working Group, the World Federation of Exchanges has prepared a set of voluntary recommendations and practical advice to its member exchanges on how to implement their sustainability policies. The World Federation of Exchanges’ Guidance & Recommendations was presented at the World Federation of Exchanges’ General Assembly in Doha on 20 October 2015, it provides material ESG metrics, with 34 key performance indicators to measure the best sustainability practice.13 The stock exchanges can incorporate these recommendations into their disclosure guidance to their listed companies, and therefore meet their Sustainable Stock Exchanges’ commitments.

Initiatives as the Sustainable Stock Exchanges, the CERES Investor Listing Standards Proposal and the World Federation of Exchanges’ Sustainability Guidance and Recommendations are pioneer initiatives paving the way towards achieving a basic level of ESG disclosure through the stock exchanges’ listing requirements. Harmonization of ratings standards is in the horizon but it is still not concrete and stock exchanges can do more. Corporate Knights Capital’s report, financially supported by Aviva Investors and ratings agency Standard & Poor’s, recognizes that stock exchanges have yet done little to develop and expand ESG disclosure policies, however they do have an enormous potential to do so.1415 The Sustainable Stock Exchanges have the power to contribute to solving current and future ESG challenges by mandating companies to provide ESG information in a comparable way and on a timely manner.16

The UNCTAD have suggested 5 ways of how stock exchanges can address sustainability and ESG issues (UNCTAD 2014).17 These are: i) conditional on regional and/ or regulatory requirements, exchanges can encourage the disclosure of ESG information by the companies listed on their markets, whether on a mandatory or voluntary basis; ii) exchanges or regulators can directly gather and/ or compile ESG metrics submitted by listed companies; iii) sustainability-themed financial products can provide incentives to issuers and create opportunities for capital allocation to ESG leaders or appropriate projects; iv) as companies themselves, individual exchanges should themselves consider producing a sustainability report; and v) participation in sustainability-related initiatives and events, relevant engagements with stakeholders and collaboration with sustainability experts in their markets.

There is a business opportunity for stock exchanges, investors and companies to embrace ESG in their listing requirements. Academic research is backing up the integration of sustainability into companies’ business strategy finding more robust evidence that ESG factors materially impact corporate financial performance and stock prices.18 Research to compare performance of companies integrating sustainability into their business strategy with companies that do not, has been growing.1920 Other research suggested a positive relationship between ESG disclosure and a company’s share price.21 Research shows that the corporate financial success is influenced on their ESG risks and opportunities as these have the potential to significantly impact future business operations, which ultimately will impact stock price performance.22