Stock exchanges – a force to promote sustainable development?

Often seen as a symbol of the ills of modern capitalism, stock exchanges can also choose to wield their influence for good, says vice chair of Arabesque, Georg Kell.

Stock exchanges are not usually associated with social or environmental causes.

A market place for trading securities and providing liquidity, they have long played an essential role for economic development and growth. As part of the inner core of the market system, they are also seen by critics as a symbol of what is wrong with modern capitalism – an obsession with profit at any cost, driven by short-termism and speculation.

While a few exchanges started supporting social and environmental causes more than 15 years ago, notably the Johannesburg Stock Exchange (JSE) and the Sao Paulo-based BM&FBOVESPA, exchanges have so far paid little attention to environmental, social and governance (ESG) factors.

This is changing rapidly, however. In June this year, the Singapore Exchange (SGX) introduced a new listing requirement on the basis of “comply or explain”, which from January 2017 will require all listed companies to prepare a sustainability report on ESG factors. These reports should include a materiality analysis, performance indicators and a board statement.

In the words of SGX special adviser Lian Sim Yeo, this will “improve the information flow on issues that matter for financial success”. SGX will join 12 other exchanges which incorporate ESG information into their listing rules, and over 20 exchanges which have committed to provide formal guidance on ESG disclosure.

It is clear therefore that exchanges are becoming a major force in the emerging infrastructure on ESG data which investors increasingly demand for in order to assess risks and opportunities over and above traditional financial information.

But the role of exchanges is not limited to promoting disclosure. Many of them also provide learning and training for companies and investors to get a better handle on ESG issues, and nearly 40 exchanges offer special products such as ESG indices and green bonds.

The UN Sustainable Stock Exchanges (SSE) initiative today includes 60 exchanges representing 70 per cent of all listed equities. The SSE is now a global movement, and its short history mirrors the rapid rise of non-traditional financial issues in valuation.

In 2004, shortly after we issued the report “Who Cares Wins” - which coined the term ESG - we convened the first-ever meeting between the United Nations Global Compact and exchanges.

With the notable exception of BM&FBOVESPA and the JSE, the majority was not prepared to use their considerable influence to advance social and environmental issues.

As a matter of fact, representatives of the World Federation of Exchanges (WFE) came to see us shortly afterwards to remind us that capital markets are not a playground for UN civil servants.

Following the financial crisis of 2008 however, a renewed effort was made and in 2009, the SSE was formally created at a meeting at the UN Headquarters in New York.

The role of exchanges is not limited to promoting disclosure. Many of them also provide learning and training for companies and investors to get a better handle on ESG issues.

A light support infrastructure backed initially by the UN Global Compact, the Geneva-based UN Conference on Trade and Development (UNCTAD) and the Principles for Responsible Investment, helped to initiate regular exchanges of best practices and learning. The UNEP Finance Initiative soon followed, forming a loosely coordinated secretariat for the SSE.

Without dedicated resources, the SSE has grown impressively over the years largely because of dedicated norm entrepreneurs within the UN. Anthony Miller of UNCTAD has been the driving force behind the SSE, and I hope that it will continue to thrive.

Today, the WFE no longer opposes the integration of ESG into listings and valuation. On the contrary, sustainable development is one of its top priority themes and it dedicates great effort to share best practices and learning.

Indeed, in 2014 several SSE Partner Exchanges lead by Nasdaq, JSE and BM&FBOVESPA worked within the WFE to create its own Sustainability Working Group.

This shows that change from within is possible, and it is to be hoped that other global industry associations will change course as well, both for the good of their members and for the sake of the planet and its people.

Georg Kell is vice chair of Arabesque and founding director of the UN Global Compact. This commentary was written exclusively for Eco-Business.

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