5.4.0 Introductie

With increased globalization and technology developments stock exchanges started differentiating themselves. Fierce competition contributed to more entrepreneurial stock exchanges (Aggarwal, 2012) as these had to include innovation in their new business strategy to differentiate themselves and standout.1 The development of sustainability indices within stock exchanges came as part of their new business strategy, as they saw it as a new business opportunity. These are specialized indices, with specific ESG disclosure listing requirements, combining multiple sources of data, originated to respond to a new upcoming demand for non-financial information coming from different stakeholders. Among others, large companies, non-governmental organizations (NGOs), investors and stock exchanges themselves. Sustainability indices are investment tools that provide a benchmark on corporate ESG risks. It is a point of reference for assessing corporate ESG risks and opportunities. Investors can use it to identify the frontrunners, trends and monitor progress. These indices are both a business product (sustainable investment product),2 to generate profit for the exchanges and are aimed at benchmarking ESG practices among their listed companies.3 Each year companies are evaluated, a strict methodology (using specific criteria, among others, industry, theme, geography) assesses the way they manage and anticipate their risks and opportunities.4

In a context of market distrust and insecurity as a result of a number of crises, as financial, environmental and social crisis, stock exchanges have been contributing to ESG disclosure through the creation of sustainability indices. Through the sustainability indices’ listing requirements they can guarantee increased sound and reliable ESG disclosures to investors. Besides, their listing requirements are an incentive to disclosure and ultimately to positive corporate change.

In order to capture a complete picture of a company’s true value, investors need quantitative sustainability data that is both comparable and, ultimately, financially relevant.5 Through sustainability indices companies are able to provide sustainability information in a language that investors understand. “Increased transparency on sustainability impacts is an essential means by which exchanges contribute to building the trust needed to ensure well-functioning, stable and resilient capital markets.”6

Below in table 2 it is shown a compilation of sustainability indices part of a number of the sustainable stock exchanges.7

Table 2 – compilation of sustainability indices part of a number of the sustainable stock exchanges

Source: Sustainable Stock Exchanges Initiative (SSE)17

The publication of sustainability or integrated reports by listed, privately held and state-owned companies was made a listing requirement in 2010 by the Johannesburg Stock Exchange in South Africa. The Johannesburg Stock Exchange had the support of the South African Government with three successive government- mandated King reports on corporate governance.18 It is also mandatory for listed companies in France and Denmark, and for state-owned enterprises in Sweden. Moreover, the EU is studying the possible introduction of mandatory sustainability reporting for all member states.192021

The Global Initiative for Sustainability Ratings (GISR) defines rating as a set of methodologies, rules, and procedures, including, but not limited to, principles, issues, and indicators, used to assess one or more aspects of the sustainability performance of a company.22 And defines the rater as any entity that applies a rating to companies. These may be the exclusive, principal, or minor activity of such entity and may be a single or multi-issue coverage, encompassing both single and multi-issue rankings and indices, developed by for-profit and not-for-profit enterprises.

Below in table 3 it is shown a compilation of sustainable raters, as provided by GISR (2013).

Table 3 – sample of sustainable raters, as provided by GISR (2013)

Source: Compiled by the Global Initiative for Sustainability Ratings23

The number of raters is growing quickly, identified by the Network for Business Sustainability’s Leadership Council as one of its 2013 challenges.24 According to SustainAbility, there are approximately 100 sustainability raters who rank companies worldwide on their ESG impacts.25 Some raters are issue-specific, for example addressing climate change or carbon footprint as the CDP (former Carbon Disclosure Project) others address multiple ESG risks, as the investor-focused sustainability indices, as for example the Dow Jones Sustainability Index (DJSI) and the FTSE4Good (London Stock Exchange Sustainability Index). The raters obtain their information, among others, requesting information directly to the companies through questionnaires and surveys. Very often companies answer several times the same information to satisfy all the raters’ requests.26 Among the complaints is the fact that not always the requested information is material to the companies’ business. The raters frequently measure similar things in different ways. Possibly this happens as a consequence of the complex and qualitative nature of the sustainability field. The growing proliferation of raters is a result of the lack of a globally accepted set of sustainability rating standards.27

Ratings provide information about ESG risk management, strategy, new business opportunities, long-term competitiveness and reputation, are amongst the most important (GISR, 2013). However, there is according to GISR, from this investor- rating relationship a lack of a trusted, external, non-commercial party that provides guidance on what constitutes excellence in ratings.28 Such an entity would help inform investor decisions regarding the use of various ratings products as well as expand the global market for high-quality ratings. The GISR is a joint project of CERES and the Tellus Institute, the founders of the GRI.29 The GISR works with a group of investment managers, pension funds, companies, NGOs, accountancies, academics, governments, raters and the public towards developing a globally accepted ratings standard.30 It does not rate the companies; its mission is to certify ratings organizations based on whether they follow GISR standards bringing clarity, consistency and relevancy to the ratings. Its mission is to serve as a standard of excellence for sustainability ratings and foster the harmonization of ratings’ frameworks for assessing the sustainability performance of companies.31

Each of the market participants in the sustainability value chain has their own interests, which may coincide or not between each other. When interests diverge there is a need to reach a compromise, reconciling all the interests involved. Only then, the ESG ratings will be relevant and useful to all the market participants (GISR, 2013).