Several exchanges – many of them in emerging markets – have taken initiatives in recent years that are designed to raise issuing companies’ awareness and/or to promote or require better transparency and disclosure on ESG-related performance and risk factors.
In Malaysia and Thailand, for example, the emphasis has been on promoting corporate social responsibility (CSR) concepts, including publication of annual CSR/sustainability reports on (initially at least) a voluntary basis.
Bursa Malaysia (see case study) began by publishing CSR guidance for companies in September 2006, followed by sponsorship of prestigious annual awards for CSR reporting in conjunction with partners such as the Malaysian Institute of Management. At the same time, Bursa Malaysia has closely monitored and evaluated the quality of CSR reporting in Malaysia, publishing a detailed report on companies’ progress in April 2008.
The Exchange also worked closely with Malaysia’s regulators and policy-makers to begin a carefully paced transition to mandatory CSR reporting by listed companies: Malaysian companies are now required to include in their Annual Reports a description of their CSR activities and practices or, if there are none, a statement to this effect. This requirement is also incorporated into Bursa Malaysia’s listing rules. The format and content of this disclosure are not prescriptive, although the trajectory set by Bursa Malaysia since 2006 suggests that, over time and as companies gain experience, there could be closer alignment with the international ESG reporting standards set by the Global Reporting Initiative (GRI).
The Stock Exchange of Thailand (SET) has taken a slightly different approach to raising CSR awareness and standards. In 2007, SET established a Corporate Social Responsibility Institute (CSRI) to encourage the business sector to be more involved with society and the environment and to promote concepts and practices relating to CSR. SET also conducts the annual CSR Awards to recognize listed companies that demonstrate exceptional contributions to society. Substantive measures have also been undertaken to raise corporate governance standards.
China’s stock exchanges have followed a similar path of CSR awareness raising and encouraging companies to publish annual CSR reports. The Shenzen Stock Exchange issued CSR guidance for listed companies in early 2006 and has followed this with training programs, whilst the Shanghai Stock Exchange (see case study) introduced equivalent measures in May 2008 in the form of the ‘Shanghai CSR Notice’ and the ‘Shanghai Environmental Disclosure Guidelines’.
The measures taken by both the Shanghai and Shenzen Stock Exchanges sit within a wider framework of government policy to harness the capital markets to foster environmentally and socially sustainable private sector development. This includes the “Green Securities” policy, launched by the Ministry of Environmental Protection (MEP) in February 2008 in partnership with the China Securities Regulatory Commission (CSRC). The policy aims to make it harder for polluters to raise capital by requiring companies listed on the stock exchange to disclose more information about their environmental record.
The “Green Securities” policy was enhanced by the issuance of the “Green IPO” policy in June 2008. This requires enterprises in liang gao ? industries to undergo an environmental assessment by the MEP before initiating an IPO or obtaining refinancing from banks. During a 10-day pre-IPO evaluation period, MEP conducts its own assessment and calls for the public’s opinion through a national hotline. If MEP approves the company, it then issues a permit to let the IPO proceed. As of September 2008, this process was responsible for the rejection or further review of IPOs from 20 out of 38 companies reviewed since the policy was implemented in February 2008.
Many exchanges are involved in providing various types of sustainability indices and these are discussed in the following section. However, it is relevant to note here that in several cases - particularly BM&FBOVESPA (see case study) and the Johannesburg Stock Exchange (see case study) - raising corporate sustainability standards among listed companies has been central to the business rationale and project design. This is reflected in a strong emphasis on stakeholder consultation, industry outreach, strategic partnerships with business schools and other capacity-building organizations, and making index components and weightings publicly available.
In developed markets, the Corporate Governance Council of the Australian Securities Exchange (ASX) (see case study) has taken an important step by referencing sustainability-related issues in the August 2007 revision to its Corporate Governance Principles and Recommendations. ASX listing rules require listed companies to disclose the extent to which they have followed the Recommendations and, if a Recommendation has not been followed, the reasons for not following the Recommendation. Disclosure is on an “if not, why” basis.
The Revised Principles include the recommendation under Principle 7.1 that “companies should establish policies for the oversight and management of material business risks and disclose a summary of those policies”. What is notable in the sustainable investment context is that the commentary goes on to add that “….these risks may include but are not limited to: operational, environmental, sustainability, compliance, strategic, ethical conduct, reputation or brand, technological, product or service quality, human capital, financial reporting and market-related risks” (emphasis added). The Revised Principles also emphasise the importance of involving internal and external stakeholders – including the broader community – in the development of risk management policies.
The June 2008 edition of the ASX’s annual review of companies’ compliance with its corporate governance standards included a particular focus on adherence to the new Principle 7 in 2007 annual reports. 85% of listed companies indicated adoption of Recommendation 7.1 but did not then disclose descriptions of the policies they were adopting. The review found that approximately 15% of entities reported on a wider range of risks. Of the entities that reported on a wider range of risks, the risks most commonly reported on were: compliance (70%), financial reporting (65%), operational (64%), and environmental (54%). Other types of risks reported on were; people, strategic, sustainability, strategic, ethical conduct, reputation/brand, technological, product/service quality, human capital and other including occupational health & safety and legal.
ASX’s approach is similar to that of the Taiwan Stock Exchange (TWSE). In 2006, the TWSE revised its Corporate Governance Best-Practice Principles for Listed Companies (CG Best-Practice) to recommend that listed companies should set up environmental protection or other committees (such as CSR Committees) and have them stipulated in their articles of incorporation. Furthermore, since 2008, TWSE’s regulator has required all listed companies to include CSR reporting in the corporate governance statement of the annual report and prospectus, including the information on the company’s CSR system, measures adopted and performance.
To raise ESG awareness and standards among listed companies, the TWSE is working closely with the Gre-Tai Securities Market, Taiwan Business Council for Sustainable Development and the Taiwan CSR Institute to draft CSR guidance for companies. The final draft was submitted to TWSE’s regulator in May 2009 for approval.
The National Stock Exchange of India (NSE) provides yet another example of the innovative measures that exchanges can take to raise the ESG awareness of listed companies and help them to improve ESG disclosure and investor relations. In the NSE’s case, the strategy also includes the goals of educating local investors and promoting the Indian market to international investors with an interest in ESG issues. In September 2009, NSE will host a capital market markets forum in Mumbai on the theme of “Responsible Investment in India” in association with the UN PRI, the International Finance Corporation (IFC), TERI-Europe and Delsus Limited.
NSE’s invitation-only event is aimed at foreign institutional investors, CEOs of India’s leading businesses and senior representatives from Indian pension funds, asset managers and banks. Confirmed international speakers include the TIAA-CREF, PGGM, APG, Robeco and the Office of the Comptroller, City of New York. The event is intended to provide two-way benefits by helping Indian companies to get a better understanding of the ESG agenda of foreign institutional investors, and helping foreign institutional investors to get a better understanding of the ESG issues and investment opportunities in India.
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