As the CEO of one of the world’s largest pension funds, the California State Teachers’ Retirement System (CalSTRS), I have a clear obligation to ensure the financial security of hundreds of thousands of California’s educators and their families. To fulfill our fiduciary responsibilities, prudent investment of their retirement savings means relying on legally required financial disclosures thousands of companies make to securities regulators every year, both in the U.S. and abroad.
Increasingly, the most significant risks to companies, and to the global economy, are sustainability risks such as climate change, income inequality, extreme weather and water scarcity. The World Economic Forum’s 2014 Global Risks Report places these four in the top 10 global risks that could lead to systemic economic disruption.
Typically, financial disclosures in the U.S. and elsewhere do not capture such corporate risks, and regulators and exchanges often do not require this type of reporting. The relatively new Sustainability Accounting Standards Board (SASB) here in the U.S. has recently begun the arduous task of identifying those factors that are material to a company’s short and long-term sustainability for their securities reporting, and is advocating the reporting of them with the U.S. Securities and Exchange Commission.
Even though some companies voluntarily disclose information about how these risks impact them and how they are managing them, there is still no mandatory or standardized sustainability disclosure across global markets. It is extremely difficult for investors like CalSTRS to evaluate how well, or how poorly, companies are prepared to perform in an economy that could be fundamentally reshaped by sustainability challenges, and where investors like us own sectors that span the globe.
That may soon change.Last year, more than 100 global institutional investors – organized by Ceres, a US-based nonprofit sustainability advocacy group – drafted a proposal to the world’s stock exchanges on the kinds of sustainability reporting they would like companies to make. Supporting this effort is the U.N.-sponsored Sustainable Stock Exchange Initiative, which brings together regulators, exchanges, investors and companies to discuss best practices for sustainable capital markets. The sustainability reporting proposal is now being considered by leading stock exchanges in the World Federation of Exchanges.
Why are these disclosures important to CalSTRS and other big investors? Sustainability risks aren’t a future problem. The world of risk and opportunity for businesses in every sector of the economy – from utilities to agriculture, manufacturing to tourism – is already shifting. The risks are not just financial. Competition for increasingly scarce water in a thirsty world points to conflicts among residential consumers, industry and farmers that could escalate more broadly over time. As the Earth’s climate warms and sea levels rise, trillions of dollars of vital urban infrastructure will be at risk. Even now, much of it needs to be re-engineered and rebuilt for changes that lie ahead. A rapid yet responsible transition from a carbon-based economy to one powered by clean, renewable resources should be the goal. From innovation in clean energy and “green” transportation, to new water-efficient manufacturing, opportunity abounds.
Major institutional investors such as CalSTRS, which together manage trillions of dollars in assets, can help meet the world’s sustainability challenges by how we allocate our capital. We can, for example, either invest in outmoded, unsustainable industries, or where possible, spur clean energy development and innovation by investing in companies that are helping to create a sustainable future. This is where consistent and comparable corporate sustainability reporting comes in.
Some stock exchanges set the standards companies must meet in order for their shares to be traded on the exchange; in other cases, law establishes those standards. Either way, mandatory sustainability disclosure is an idea whose time has come. For example, the European Union will require some 6,000 companies by 2017 to disclose information related to their performance on environmental, human rights and other issues. Some exchanges, such as the Johannesburg, Australian and London Stock Exchanges, already require certain types of sustainability disclosures.
The list of major stock exchanges coming together to address the idea of a standard for sustainability disclosure continues to grow. Earlier this month, the London Stock Exchange joined the UN SSE Initiative, which commits it to helping drive sustainability into thecapital markets and working with its listed companies to do so. The World Federation of Exchanges, a trade association of stock exchange operators, recently formed a working group devoted to addressing sustainability disclosure issues – a group that comprises 18 exchanges, from the New York Stock Exchange and NASDAQ, to increasingly influential exchanges like Shenzhen, BM&FBOVESPA in Brazil, and the National Stock Exchange of India.
Once seen as pie-in-the-sky, mandatory corporate sustainability reporting now seems inevitable. It will be a major step in reforming capital markets so they can better serve the cause of long-term global prosperity.
Jack Ehnes is the CEO of the California State Teachers’ Retirement System