The World’s Exchanges and Sustainable Development
Although exchanges are still grappling with the consequences of the demutualization process, with innovations in information and communication technologies, and with new demands regarding corporate governance, they adhered to social responsibility standards. Many world exchanges have endorsed sustainable development as foreseen in the Brundtland Report and all its political ramifications.
The first initiative undertaken by the exchanges to respond to this global trend was the development of market tracking indices. Between 1999 and 2006, based on the performance of companies committed to sustainability, eight exchanges, all WFE members, voluntarily created 22 different indices to measure the stock performance of these companies in their respective markets without any external intervention.
In 2006, seven years after the first initiative by an exchange, i.e. the NYSE Arca Cleantech Index, the United Nations published a booklet containing six principles that it considered relevant for ‘Responsible Investment’. Similar to the document on OECD Corporate Governance, which in some ways was incorporated in the booklet, the recommendations developed by the United Nations are not mandatory, but rather a set of aspirations based on voluntary adherence. Although aimed specifically at institutional investors and asset managers, the UN program was launched in April 2006 by the then Secretary-General Kofi Annan at an exchange where it could gain maximum impact and visibility, the NYSE. Even though the document is not directed at exchanges, this gesture explicitly recognized their importance as major agents in implementing the policies outlined in the program.
The United Nations Principles for Responsible Investment are gathered under a single and comprehensive code of ethics called the ESG (Environmental, Social and Governance) standards. The clear and highly focused objective of these principles is to raise awareness of institutional investors and asset managers to the importance of directing their formidable financial power to invest in companies engaged in good social and environmental practices. As a result, a vast supranational network of filters, pressures, demands, commitments, and moral suasion was created to stimulate the adoption of these principles.
The guidelines that have been set and subscribed to by investors and managers are divided into few areas. The first guideline established that environmental, social and governance issues should be incorporated into the investment analysis and decision-making process of each institution. Next is the determination that all committed entities should maintain a high level of corporate activism, and add the aforementioned standards to their policies and practices as shareholders. The third point concerns the search for transparency regarding ESG matters by companies where financial resources are invested. The fourth guideline refers to the purpose of disseminating these principles throughout the investment industry. This is followed by the intention to act jointly with other signatories towards disseminating the proposed ESG policies, and finally the shared commitment to promote their own activities in support of other subscribers to these principles, together with third party stakeholders.
With these basic rules in place, the fund managers who signed the UNPRI document began to require the companies of which they are shareholders, or to which they are lenders, to implement methods, procedures and processes that comply with the best available environmental, social and corporate governance standards. Those target companies, in turn, were instructed to require that their suppliers, distributors, dealers and other members of their production chains follow identical behavior patterns.
The collective impacts of these measures on the reduction of greenhouse gases and on the other deleterious effects threatening the environment are as yet unknown. However, one can already see the unequivocal response from companies that have chosen to boycott products derived from the deforestation of the Amazon rainforest or from the exploitation of labor with practices akin to slavery.
Paradoxically, although not addressed to exchanges, the behavioral framework outlined by the United Nations PRI strengthened their responsibilities in the field of environmental and social issues and in corporate governance. Side by side with the voluntary work developed in the engineering of different indices for monitoring the actions of socially and environmentally responsible companies, exchanges began to see their own actions being subjected to greater scrutiny.
By 2006, most of the world’s regulated exchanges had been demutualized, turning into for-profit entities owned by shareholders instead of members. Among their new partners were institutional investors who subscribed to the UN’s ESG principles. Thus, the exchanges promoting CSR and ESG pursued two distinct approaches. Externally, they induced companies under their umbrella through the offering of public platforms, dedicated investment niches, and inclusion into differentiated indices. Internally, they helped companies seeking compliance to satisfy the demands of their own shareholders and their communities.
This twofold approach to ESG consolidated the authority of exchanges regarding social responsibility. While suggesting, indicating and ranking behaviors within the scope of listed companies, which is their field of exogenous influence, exchanges are at the same time compelled to conform to the highest standards of endogenous requirements in conducting their own businesses.
Following the publication of the United Nations Principles for Responsible Investments, exchanges continued with their policy of setting new indices to measure the performance of companies committed to ethics and sustainability. From 2006 to late 2009, 29 indicators were created, thereby more than doubling those that had been available since 1999. At the same time, the market saw a substantial growth in the specific niche of exchange-traded, closed-end funds designed to invest in companies that use clean technologies.
Some exchanges in East Asia have promoted even more explicit policies with regard to ESG-related issues, reinforcing their roles as social agents. In Malaysia, for instance, the publication of standardized annual social responsibility and sustainability reports by listed companies is on the way to become compulsory, and the Taiwan Stock Exchange is following Malaysia's footsteps. Shenzhen and Shanghai Stock Exchanges encourage listed companies to disclose their documents with similar purpose and frequency. They are concurrently engaged in an initiative supported by the Chinese government to accept only IPOs of companies that have passed a sustainability test. The Stock Exchange of Thailand set up an institute to encourage social responsibility and bestows annual awards on listed companies that excel in this area. In Australia, new principles of corporate governance were written for the Australian Securities Exchange, and all listed companies must state that they are following recommendations on ESG-related issues or explain why they are not.
Other tools established and then wielded by exchanges with regard to the environment are their markets for trading carbon credits, options and related products. Institutions like the Montreal Exchange, NYSE Euronext, Nasdaq OMX, Deutsche Börse, Buenos Aires Stock Exchange, and BM&FBOVESPA are examples of institutions committed to the development of such market segments. The pricing established will be of fundamental use in commercial assessments of environmental degradation.
This article is adapted from the book being prepared to commemorate the WFE’s 50th anniversary. The book is based on a dozen essays, reflecting on transformations of various sorts – trading floor to screen, member cooperative to demutualized company, starting a regulated market from scratch, the value of regulation, the effects of deregulation, etc.
The book’s purpose is to examine the various roles exchanges play in public life, and the ways in which they have contributed to the growth of capital markets over these decades.
Essays from the WFE’s jubilee book will be featured in Focus, and publication is due to coincide with the October 2010 General Assembly, to be hosted in Paris by NYSE Euronext.
About Edemir Pinto
Mr. Edemir Pinto is the BM&FBOVESPA Chief Executive Officer. He joined the Brazilian Mercantile & Futures Exchange (BM&F) in January 1986. In July 1987, he became the Derivatives Clearinghouse Officer where he was responsible for risk management, settlement, participant registration, collateral, custody and controllership. He held the position of BM&F Chief Executive Officer from April 1999 to May 2008, when the BM&FBOVESPA Board of Directors appointed him to his current position.