Exchanges Push the Sustainability Agenda

The report, which was produced by sustainable investment consultancy Delsus Limited, found exchanges were increasingly active in three main areas promoting sustainability: provision of information tools for sustainable investors such as indices; fostering specialised listing and trading platforms for sustainable investment niches and in less advanced markets, increasing awareness of environmental, social and governance (ESG) issues among listed companies.

Dan Siddy, founder and director of Delsus and author of the report, said: “Over the last five years or so, social and environmental risks and opportunities have emerged to become commonplace long-term investment themes in the world’s capital markets.

“Alongside the growing political and economic challenge of climate change and the transition to a lower-carbon future, labour standards, human rights, product safety, human capital and poverty reduction are also major issues.”

Information tools facilitating sustainable investment

In the more advanced markets of the US and Europe, indices tracking the performance of sustainable stocks have typically answered investor demand throughlicensing to tracker funds or customisation to client requirements, according to the report. However in emerging markets such as Brazil and South Africa they have been used from the outset as a tool central to addressing ESG awareness, increasing investor confidence and influencing corporate behaviour.

Over the past ten years the number of sustainability indices offered directly by WFE members has grown from just one in 1999 to 48 to date, with a significant number based in emerging markets.

Following the pioneering launch of the NYSE Arca Cleantech Index by the New York Stock Exchange in 1999, indices have sprung up in the emerging markets of Brazil, Egypt, India, Indonesia, Israel, Korea and South Africa.

Johannesburg’s SRI Index, launched in 2004 and Brazil’s BM&FBOVESPA (which links the Brazilian Mercantile & Futures Exchange with the São Paulo Stock Exchange) Corporate Sustainability Index, launched in 2005, were the earliest such indices. In both cases evaluation of listed businesses against sustainability criteria has served as a starting point to make ESG considerations mainstream for businesses and investors. Companies
found to have superior sustainability credentials in their sectors based on independent annual evaluation are admitted to the indices.

Emerging markets indices in the pipelines include Egypt’s ESG index in association with the Egyptian Institute of Directors and ratings agency Standard & Poor’s, which is due to be launched in the first quarter of 2010 and Korea Exchange’s Korean SRI Index expected to be released this quarter.

Typically sustainability indices have formed two groups: stocks from all industry sectors selected on the basis of ESG criteria and scoring systems as “leaders” in social and environmental responsibility and companies focusing specifically on providing solutions to sustainability challenges, such as clean technology.

Last year NYSE Euronext launched a third variation, according to the report, the Low Carbon 100 Europe Index, a non-sector specific index oriented around the single ESG issue of climate change which measures the performance of the 100 largest European companies with the lowest carbon intensity in their respective sectors. Other indices are pioneering strategies to measure SRI performance such as the S&P ESG India Index, which quantifies companies’ ESG practices rather than judging them on subjective criteria.

Specialised markets for sustainable investment niches

The report included members of the WFE developing international carbon trading markets where derivatives products such as futures and options based on Certified Emission Reduction credits, European Union Allowances and credits related to Clean Development Mechanism products can be traded.Those named include Canada’s Montreal Climate Exchange; the Australian Securities Exchange; US securities group NYSE Euronext which owns 60% of Paris-based carbon and environment-related products exchange Bluenext; US-European group NASDAQ OMX Commodities and Nordic power exchange Nord Pool ASA; Germany’s Deutsche Börse and SIX Swiss Exchange which jointly operate global derivatives exchange Eurex; Brazil’s BM&FBOVESPA and the Buenos Aires Stock Exchange.

The research also pointed to exchanges’ encouragement of cleantech investment through sponsorship of investor conferences and trade fairs, marketing to attract IPOs, indices and exchange traded funds focusing on cleantech. It cited Canadian Stock Exchange operator TMX Group, whose Toronto Stock Exchange and growth capital counterpart, TSX Venture, were home to 110 cleantech companies with a combined market cap of C$6.4bn ($5.3bn) at the end of 2008.

Promoting ESG awareness among issuers

The report’s findings on current initiatives to raise ESG awareness focused largely on Asia’s emerging markets where progress is broadly at an earlier stage compared to Western exchanges. It found over the past five years Bursa Malaysia, China’s Shenzen and Shanghai stock exchanges and the Taiwan Stock Exchange have led the adoption of corporate social responsibility (CSR) guidelines for listed companies in Asia.

Having established voluntary guidelines in 2006, as part of an ongoing transition to mandatory CSR reporting, Bursa Malaysia’s listing rules stipulate that companies describe their CSR activities and practices – or lack of them – in their annual reports.
Since 2008, Taiwan’s regulator (the Futures and Securities Commission, part of the Taiwanese Ministry of Finance) has required all listed companies to include details of their CSR policy, measures adopted and performance in their annual corporate governance statement and investment prospectus.

In addition to guidelines provided by its Shenzen and Shanghai exchanges, last February China’s Ministry of Environmental Protection (MEP), in partnership with the country’s stock exchange regulator, the Securities Regulatory Commission, launched a “Green Securities” policy designed to make it harder for polluters to raise public capital through reporting on their environmental track record.

Last June the MEP introduced a “Green IPO” policy requiring “liang gao” – energy intensive or polluting industries – to undergo an environmental assessment ahead of an IPO or bank refinancing. During a ten-day pre-IPO evaluation, MEP conducts an assessment and invites public opinion via a national hotline. Under the policy between February and September 2008 20 out of 38 companies were pronounced ineligible for IPO or subject to further review.

Taking an alternative approach to those of its Asian peers, the Stock Exchange of Thailand has established a Corporate Social Responsibility Institute to promote concepts and practices relating to CSR.

The National Stock Exchange of India is also embarking on a programme to increase its engagement with listed companies on ESG issues and to attract international investors with an ESG mentality to the Indian market.This month India’s NSE will host a capital markets forum in Mumbai on the theme of Responsible Investment in India. The discussion will bring foreign institutional investors together with local chief executives and representatives from Indian institutions, to improve mutual understanding of the ESG issues and opportunities they face. The exchange also launched its first sustainability index – the S&P ESG India Index – last year which ranks the ESG practices of fifty top companies in the country against industry peers.

In more established ESG markets the Australian Securities Exchange introduced a “comply or explain” policy in August 2007 for its revised Corporate Governance Principles and Recommendations (first issued in 2003), while the research also cited the Luxembourg finance initiative and its IFFIM bond scheme for funding immunisation against illness in the developing world.

Tom Krantz, secretary-general of WFE, said: “Regulated exchanges are among society’s key institutions for valuing sustainable development, rewarding best governance practices, and channeling fresh investment toward innovative enterprise. Given the role they play in calling on the public’s savings, exchanges are mindful of their responsibilities to investors. Exchanges have moved from their pioneering work in better governance in the early 1990s to also providing trading services for environmental derivatives, and engaging with policy-makers on effective corporate reporting standards.”

Dan Siddy is a director at Delsus Limited, Catherine Craig, co-author, is a freelance journalist