WHEB Commentary

Ty Lee

Sustainable Stock Exchanges


Collecting and analysing environmental, social and governance (“ESG”) data is always a big challenge for sustainable investors. Although sustainability reporting is an increasingly popular practice, it is not sufficient to rely on a few companies voluntarily disclosing their ESG data. Long-term investors require consistent and comparable ESG data to make their investment decisions. Based on our experience engaging with companies, a lot of companies still have the mindset of just meeting the minimum regulatory requirement. Hence, more policies and regulations are needed to ensure proper ESG disclosure and data quality. This is where stock exchanges and relevant regulators should step in.

The Sustainable Stock Exchange (“SSE”) Initiative has been exploring how stock exchanges can work together with investors, regulators and companies to enhance transparency on ESG issues since 2009. Currently, there is a still wide spectrum of how exchanges approach sustainability reporting. Most exchanges have mandatory governance disclosure requirements but few exchanges go beyond governance to include environmental and social issues.

South Africa’s Johannesburg Stock Exchange (“JSE”) and Brazil’s BM&FBOVESPA are clearly the exceptional leaders on sustainability reporting. The JSE was the world’s first stock exchange to require integrated reporting from its listed companies on an “apply or explain” basis in 2010. Similarly, BM&FBOVESPA adopts a “report or explain” model for sustainability reports. Both of them are a signatory of Principles of Responsible Investment (“PRI”) and there are only 3 out of 27 exchanges surveyed by the SSE Initiative! Unfortunately, these are still not the common practices adopted by the world’s major exchanges including New York Stock Exchange, NASDAQ, London Stock Exchange and Tokyo Stock Exchange. In some cases, the implementation of sustainability reporting requirements is not solely within exchanges’ remit, which is more often shared between exchanges and regulators in some countries.

Stock exchanges face a dilemma when they consider implementing sustainability reporting requirements. On the one hand, such implementation can enhance disclosure and improve the market’s attractiveness to investors. On the other hand, exchanges are concerned about losing revenue from discouraging future listings and the associated reduction of trading volume. A recent potential IPO in Hong Kong illustrates the dilemma (although it is more on the governance side). The Hong Kong Stock Exchange (“HKSE”) rejected the listing of a Chinese e-commerce giant Alibaba, which has an unique partnership structure that would have let its 28 partners to keep control over a majority of board, although they only had a 13% shareholding. While the Hong Kong regulators rightly upheld governance standards, it meant HKSE probably lost a potential US$15 billion IPO.

While European exchanges overall still dominate in sustainability reporting, other regions are catching up. In North America, NASDAQ OMX announced a formal commitment last year to promote sustainable investment and improve ESG disclosure among listed companies. NYSE Euronext also signed up to the SSE Initiative last July to demonstrate its commitment to corporate sustainability. It is unsurprising to see that many emerging market exchanges view stronger ESG credentials as a differentiating and reputation-enhancing factor as poor ESG disclosure remains a major challenge to investing in emerging markets. Emerging market stock exchanges such as Brazil, China and India are rapidly closing the sustainability reporting gap.  According to CK Capital, emerging markets stock exchanges are on track to overtake those in developed markets by 2015 in terms of the proportion of their large listings that disclose the seven most widely disclosed sustainability indicators. I am very pleased to see these positive developments and I hope the improving ESG disclosure practices will help create a virtuous cycle to stimulate more responsible investment.

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