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November 04, 2009

Role of Stock Exchanges on Corporate ESG Disclosure Gains Traction
    by Robert Kropp

Reports from the World Federation of Exchanges and EIRIS coincide with UN meeting on how stock exchanges can encourage responsible investment. -- The potential role of stock exchanges in promoting corporate transparency on environmental, social, and governance (ESG) issues gained overdue prominence in recent days, when a meeting was held at the UN on November 2 in which institutional investors and CEOs of stock exchanges explored how they might work together with regulators and business to encourage responsible long-term approaches to investment.

The meeting at the UN was co-hosted by the Principles for Responsible Investment (PRI), the UN Global Compact, and the United Nations Conference on Trade and Development (UNCTAD).

An attendee at the meeting was Aviva Investors, a UK-based asset management company, which called on "stock exchanges around the globe to more actively promote corporate responsibility and transparency among the companies that are listed on exchanges."

In October, the World Federation of Exchanges (WFE) issued a report entitled Exchanges and Sustainable Investment, in which the trade association of 53 publicly regulated stock, futures, and options exchanges surveyed its members to "help share experience and ideas within the global community of exchanges, and to raise awareness amongst market participants, regulators and other external stakeholders."

Identifying climate change and the transition to a low-carbon economy as key drivers of the entry into mainstream investment of the priorities of socially responsible investors, the report asks, among other issues, "How can exchanges help to shape the way that regulatory conditions and reforms facilitate ESG transparency and sustainable investment flows?"

The report describes the categories in which responsible investment initiatives by exchanges are currently engaged. In addition to raising awareness and standards of ESG issues among listed companies, exchanges have developed products and services for sustainable investors, included markets for specific sustainable investment niches. spoke with Dan Siddy, Director of Delsus Limited, an environmental, social, and governance (ESG) consulting and advisory firm, who is the author of the WFE report.

"Exchanges in emerging markets have been doing a tremendous amount in addressing market quality, corporate governance, and social issues," Siddy said. "In developed markets, the initiatives that exchanges take are mainly training instruments that investors can use. Sustainability indexes are one example of this, and others are environmental exchange-traded funds (ETFs) and carbon markets."

"Exchanges in developed markets are also competing for listings of clean tech companies," he continued.

The WFE report contains a wealth of information about initiatives taken by exchanges worldwide to address ESG issues. In Australia, for instance, the Australian Securities Exchange recently revised its Corporate Governance Principles and Recommendations to require listed companies to disclose the extent to which they have followed recommendations on the oversight and management of material business risks, including ESG issues. Companies that fail to follow the recommendations must disclose why they have not.

Regarding the Green Securities and Green IPO policies launched by the Ministry of Environmental Protection in China, Siddy said, "The China example is totally unique, with its green IPO policy." The Chinese Green IPO policy requires companies in 14 energy-intensive industries to undergo an environmental assessment before initiating an IPO or obtaining refinancing from banks.

Siddy said of some of the other initiatives undertaken by exchanges in emerging markets, "In Brazil and South Africa we're seeing some products and services being developed. On corporate governance and social issues in Brazil, the Sao Paulo Stock Exchange has had a big impact, raising standards among issuing companies and increasing investor confidence."

Examples of indexes launched by exchanges in Brazil and South Africa are the Bovespa Corporate Sustainability Index in Brazil, and the JSE SRI index in South Africa.

The report found that "developed market exchanges are focusing primarily on investable indexes which can be licensed to tracker funds or customized to client's specific requirements." Products include broad-based indexes that use ESG criteria for selecting companies, such as the FTSE4Good index series, and sector-specific indexes that focus on companies engaged in clean technology, sustainable energy and environmental services.

A third category of product was issued by NYSE Euronext this year, when the exchange launched a broad-based index based on the single ESG issue of climate change. The NYSE Euronext Low Carbon 100 Europe Index measures the performance of the 100 largest European companies having the lowest carbon intensity in their sectors.

In general, Siddy said, "Stock exchanges have been deeply involved with national regulators in discussions about regulatory reform, and the WFE has been closely involved in pushing for development of better accounting and auditing standards."

Coinciding with the meeting at the UN was the release of another report, from EIRIS, a global provider of research into corporate ESG performance. The EIRIS Report on Sustainable Stock Exchanges found that as businesses in their own right, more than half of stock exchanges achieved less than average scores in managing their own ESG impacts.

On the other hand, EIRIS found that "stock exchanges have already started playing a role in promoting better ESG disclosure through IPO and listing requirements in some countries."

The recommendations provided in the EIRIS report include the implementation of ESG disclosure requirements into listing rules and corporate governance standards.

At the UN meeting on Sustainable Stock Exchanges, Paul Abberley, CEO of Aviva Investors, said, "Our main focus is on promoting a global listing environment that requires companies to consider how responsible and sustainable their business model is. Direct opportunities to vote at company Annual General Meetings on corporate responsibility reports are almost unheard of. I am strongly of the view that amending specific market listing codes in this way has the potential to make capital markets substantially more sustainable."

But according to Siddy, who attended the meeting, "One of the challenges is that asset owners and managers need to have a better understanding of the business models of exchanges. Aviva was calling for exchanges to issue listing rules, but the regulatory powers of exchanges are limited. If you're going to have rules, you have to be able to enforce them. Understanding what exchanges can do on ESG issues is important."

"One of the key things that came out of the UN meeting is that many asset owners and managers had not been aware of the full range of activities by the WFE," Siddy continued. "Some asset owners seem to think that stock exchanges are part of the cause of lack of transparency on ESG disclosure, but you can't look at that in isolation from such things as accounting standards."

Furthermore, Siddy said, "Discussion about ESG is part of the larger issue of financial stability. We've seen a lot of input from investment banks, but little from asset owners on the broader aspects of transparency and disclosure."

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