The exchange express

Could stock market regulations prove to be a quicker route to implementing sustainability practices across businesses than action by governments?

Momentum behind sustainability reporting is building. Last year saw Paragraph 47 of the United Nations Rio+20 Earth Summit’s outcome document giving explicit support for the concept of sustainability reporting by listed and large companies. Various governments then formed the Group of Friends of Paragraph 47 to keep the ambition alive. Major investors and other bodies, including ACCA, are also keeping up the pressure through the Corporate Sustainability Reporting Coalition (CSRC), lobbying governments to develop national regulations mandating the integration of material sustainability issues in companies’ annual reports and accounts.

Intervention by policymakers does appear necessary, as voluntary sustainability reporting by companies has so far been relatively limited. According to a 2012 report by Corporate Knights Capital and commissioned by Aviva Investors, Trends in Sustainable Disclosure: Benchmarking the World’s Composite Stock Exchanges, the breadth of sustainability reporting in 2010 was below that of 2008. Only 52 companies out of 4,001 mid, large and mega caps around the world engaged in ‘complete’ disclosure of first-generation sustainability indicators on topics such as pay, energy, water and greenhouse gas emissions.

If some form of regulatory action is required, many favour stock exchanges as the optimal channel. ‘Stock exchanges and their requirements can move faster than governments introducing legislation,’ says Rachel Jackson, ACCA’s head of sustainability. ‘If we want to improve and enhance transparency, we should be looking to stock exchanges to require greater sustainability reporting via their listing rules. They can also get right to some of the largest companies in any country.’

Mixed response

But are stock exchanges getting the message? Back in 2009 the Sustainable Stock Exchanges (SSE) initiative was launched by the UN as a forum to explore ways to enhance corporate transparency on environmental, social and governance (ESG) issues and encourage sustainable investment. Exchanges that sign up as partners commit to promoting sustainable investment and improved ESG disclosure among companies listed on their exchange. So far, few have done so, and almost all are in emerging markets. Signatories include Bombay, the Brazilian BM&F BOVESPA, Istanbul, Johannesburg (JSE), the Egyptian Exchange and MCX (Multi Commodity Exchange of India). Of exchanges in developed markets, until recently only Nasdaq had signed up; however, on 24 July this year, the New York Stock Exchange also became a partner, suggesting growing support  in North America.

Nasdaq is also supporting work by the Investor Network on Climate Risk and others to develop a common sustainability disclosure listing standard that all stock exchanges could adopt. Sustainability and disclosure standards for ESG reporting may subsequently be featured at the annual meeting of trade body the World Federation of Exchanges in October.

The issue of sustainability and integrated reporting is also on the agenda of the International Organization of Securities Commissions, a previous sponsor of SSE initiative conferences. In June 2013 IOSCO’s board decided to study integrated reporting to gain a better understanding of the issues and consider next steps.

‘Common standard’

Such action is widely welcomed. ‘Put yourselves in the shoes of CFOs of global companies with probably multiple listings. They won’t want a different requirement for New York, London and Hong Kong,’ says Jon Williams, PwC sustainability and climate change partner. ‘One common standard that could be applied as a minimum requirement across all the exchanges is a must.’

Williams believes that the best way to get listed companies to disclose sustainability information is to make this a stock exchange listing requirement. ‘The only reason companies produce such detailed listing documents is because the market requires it,’ he says. ‘There are some shining examples of stock exchanges that have embraced this, such as Brazil and South Africa. But largely the developed world stock exchanges haven’t. It’s seen as a “nice to do”.’

Steve Waygood, head of sustainability research and engagement at Aviva Investors, a driving force behind the CSRC, is ‘hugely frustrated’ with the response from many large exchanges. He identifies some ‘honourable exceptions’, such as Toronto, the Deutsche Börse, New York and Nasdaq, all of which feel they need to take action. ‘We wouldn’t be advocating this if we didn’t feel the additional requirements were well worth the money,’ he says.

However, as highlighted by the ACCA report, The Business Benefits of Sustainability Reporting in Singapore, views are split on the role that should be played by stock exchanges and whether sustainability reporting should be mandatory for listed companies. The report noted that mandatory reporting ‘may attract a certain kind of capital and a certain kind of company, but may also discourage some companies from listing’.

Waygood feels such concerns are ‘misplaced’, but Paul Holland, a director in the Sustainability Advisory Services team at KPMG in the UK, has some sympathy. He says: ‘There is a risk of companies moving their listing if there is a significant difference in obligations of mandatory reporting. The good sustainability reporting is done for reasons other than meeting the requirements of a listing obligation. Leading companies are doing it to meet the needs of a varied group of stakeholders and to drive business performance.’

Nevertheless, stock exchanges interested in promoting sustainability reporting have increasing resources to draw upon. The United Nations Conference on Trade and Development (UNCTAD), which helped to launch the SSE initiative, is drafting guidance to act as a technical aid for stock exchanges and regulators seeking to implement or strengthen initiatives to promote corporate sustainability reporting. The idea is to identify off-the-shelf practices already tested in some jurisdictions that stock exchanges elsewhere can implement.

Many could learn from the experience of the Johannesburg Stock Exchange. ‘We believe the strongest impact we can have is through a hybrid approach that combines basic regulation with our influencing power,’ says Corli le Roux, head of the JSE’s Socially Responsible Investment (SRI) Index. This evolving index consists of companies that meet certain criteria related to their ESG policies, management practices and reporting.

‘Our approach to regulation and listing requirements has always been to try to enable the minimum investor protection and to ensure this is in place,’ she says. ‘Beyond that we aim to facilitate and enable further action by companies by creating things like the SRI Index, which is essentially a tool for investors to see what companies are doing.’

ACCA’s Jackson offers a final message to stock exchanges not yet requiring sustainability reporting of their listed companies. ‘Do it and be brave,’ she says. ‘Don’t hide behind excuses that it might not be competitive. Take a look at what’s going on in the major companies and exchanges around the world, and the stakeholder push for reporting changes. Guidance exists; get on and play your part!’

Sarah Perrin, journalist

This article first appeared in ACCA's Accountancy Futures journal, issue 7, August 2013.