Author Name: Evan Harvey, NASDAQ OMX

As Environmental, Social, and Corporate Governance (ESG) issues become more prevalent in the capital markets, investors, stakeholders, and regulators are using new data—and greater insight—to drive their decisions. Some stock exchanges play a double role in this trend, simultaneously pushing better ESG practices into their markets and protecting them from immaterial or burdensome regulation. Can an exchange support listed companies and sustainability reporting channels?

We believe the answer is yes, especially if one examines both the risk and reward side of ESG performance. IIRC CEO Paul Druckman, writing in the December 2013 issue of Focus, put the emphasis clearly on rewards. "Corporate reporting is a core lens through which investors assess a company's value," he said. "If we can achieve a breakthrough in advancing towards a more meaningful corporate reporting system over the next few years, we can unlock value that has hitherto been hidden or unrecognised."

There is a real macroeconomic opportunity within reach—more jobs, greater investment, longer-term returns—but there are many other positive outcomes. NASDAQ OMX tends to focus on three. First, a general increase in the volume and quality of investor engagement with exchanges is a good thing. Second, we want our issuer community to put the purpose and value of ESG disclosures into proper context. Finally, we are seeking to proactively define the role that exchanges play in a self-regulating environment.

Listed Company Outreach 

Exchanges are an important knowledge center for listed companies—and companies generally need some assistance when it comes to ESG. As a Corporate Knights study pointed out last year, very few companies actually disclose first generation ESG metrics (employee turnover, energy, GHG emissions, lost-time injury rate, payroll, waste, and water). Only 3% of the world's largest listed companies report on this, according to the report, and the percentage of smaller companies is much lower. To make matters worse, the reporting trend has slowed considerably since 2008.

Exchanges have a regulatory relationship with their issuers, and may choose to simply mandate change, but they are also uniquely positioned to assist in another way. The convening power and company reach of stock exchanges can be leveraged to promote good business practices. When it comes to sustainability, NASDAQ OMX commissions and distributes original research, hosts regular webinars and events, and even participates in frequent one-on-one calls with issuers. In most cases, the knowledge can be passed peer-to-peer; simply connecting high-performing ESG leaders with those who have questions is enough.

Sustainability Research & Collaboration 

An exchange may partner with advocacy groups, non-governmental organizations (NGOs), or economists in order to better understand the interplay of sustainability metrics and market dynamics. NGOs often seek these relationships because it offers entrée to many companies at once, as well as the imprimatur of exchange endorsement. NASDAQ OMX has found ways to partner with (and promote) the Global Reporting Initiative (GRI) and the International Integrated Reporting Council (IIRC). We have more substantive relationships with the United Nations Global Compact (UNGC) and the Sustainability Accounting Standards Board (SASB). But the end goal in each case is the same: to put information in the hands of issuers, stakeholders, and market participants.

Sometimes collaboration may have more pervasive repercussions. NASDAQ OMX is a founding partner and leader of the Sustainable Stock Exchange Initiative (SSEI). The SSEI explores the interrelationship of exchanges, investors, regulators, and companies in order to boost ESG transparency—and, more importantly, ESG performance. This in turn promotes responsible, long-term investment.

The Ceres Investor Network on Climate Risk (INCR), an established network of institutional investors committed to addressing climate change and sustainability challenges, formed its own Working Group to support the SSEI and engage with global exchanges. INCR believes that company-issued sustainability data is essential to the investment process should be integrated into exchange listing rules. Many exchanges believe there are better ways to meet the same goal, but both communities have been engaged in a productive (and public) conversation.

Operational Levers

The best companies "are capturing significant value by systematically pursuing the opportunities sustainability offers," as a McKinsey study famously put it a few years ago. We believe this is true, based on the data—and based on the living example provided by the high-performing ESG companies on our exchange (Intel, Cisco, and Starbucks, to name just a few). The trend is clear to us: "More businesses will have to take a long-term strategic view of sustainability and build it into the key value creation levers that drive returns on capital, growth, and risk management, as well as the key organizational elements that support the levers."

To that end, exchanges must make their own operations as lean, efficient, and sustainable as possible. We do so to extend our corporate life, and influence, but also to provide our own example for others to follow. ESG performance metrics can be painlessly integrated into an annual report, proxy statement, or even a stand-alone Corporate Sustainability report. Certain infrastructure changes (LEED certifications, green office builds, and supply chain analysis) save money and mitigate risk, but they also reaffirm the real value of sustainability within the corporate operation.

Strong Leadership, Parallel Initiatives 

Some exchanges have been exemplars in this space, long acknowledged as the forerunners of transparency and disclosure. Johannesburg and BM&FBOVESPA already require some ESG data disclosures from companies as part of their listing rules. BME, Helsinki, Tokyo, and Oslo are known for their progressive policies. Strong governments tend to drive much of this effort; traditional securities regulators, on the other hand, do not.

The Corporate Knights study also revealed a curious trend: "Stock exchanges based in emerging markets are on track to overtake those based in developed markets by 2015," the report stated. "This would constitute a watershed moment in the history of corporate reporting, as the developed world has effectively had a 20-year head start in driving sustainability disclosure."

Where will we be by the end of the decade? Perhaps more exchanges will simply require disclosures and/or integrated reporting. Some may see the value in making sustainability disclosures part of their balance sheet (cost-of-carbon, water, and energy). There are certainly myriad big data and financial product opportunities: Indices keyed on niche sustainability metrics, or a uniform database of investment-grade ESG screens. Eliminating excessive short-termism from the investment cycle may force us to consider the reduction or elimination of quarterly corporate guidance. And if executive engagement is an absolute precursor to change, as many believe, the C-suite may be incentivized to perform on ESG metrics.

Last but certainly not least, the WFE has stepped into the fray. A new working group of 10 exchanges (including NASDAQ OMX, NYSE, Deutsche Borse, BM&F BOVESPA, Johannesburg, and others) has formed in order to create an actionable and global exchange standard for ESG. One way or the other, our findings will be presented for debate at the October 2014 WFE Annual General Meeting. If successful, this little effort could end up improving ESG transparency for most of the world's public companies—indeed, most of the capital world itself.


For more information, please contact:

Charlotte Wilson
Streets Consulting
Email: [email protected]
Phone: +44 20 7959 2235
Twitter: @TheWFE