Conference report: Sustainable Stock Exchanges Dialogue in Xiamen: “One destination, many journeys

Before the fireworks signalling the end of the World Investment Forum in Xiamen last week the United Nations Conference on Trade and Development (UNCTAD), Principles for Responsible Investment (PRI) and Global Compact hosted Sustainable Stock Exchanges 2010, a ground-breaking session of exchanges, regulators, institutional investors, multilateral agencies, non-governmental organisations and finance industry experts to discuss how stock exchanges could promote sustainability and ‘responsible’ capital market development. The event’s main focus was to review the recent challenges that exchanges have experienced with the introduction of sustainability indices and ESG (environment, social and governance) disclosure regulation, and discuss whether it was even possible to pursue mandatory reporting with such large differences in the materiality of reporting indicators across each industry. Conversations both during and surrounding the sessions were optimistic and thoughtful. A spirit of ‘one destination, many journeys’ united participants. There was a general realisation that global exchanges are hugely varied entities and relationships with their regulators and owners will define how engaged they are likely to become in the sustainability agenda. Global institutions, such as Aviva Investors, the BT Pension Scheme and Sumitomo Trust, were also present to support the initiative and provide insight from an investor’s perspective. Similar to the companies listed on them, the mandate of most large global stock exchanges has become profit maximization. They are, therefore,generally disinclined to enact any changes which would reduce the high-frequency trading that drives their fee income or to introduce stronger mandatory disclosure requirements, which may cause companies to seek alternative listing locales with less regulation. In contrast, some non-profit exchanges, such as the Istanbul Exchange, are more able to drive agendas focused on training and education and support more stringent ESG reporting. Wholly- or partially-state-owned exchanges, many in developing countries such as the demutualized Bursa Malaysia, also tend to find it easier to reflect national sustainable development agendas and change their mandates and listing requirements accordingly. An excellent example of the pace of change in certain jurisdictions is the Shanghai Stock Exchange whose Chairman, Liang Geng, amused delegates with his account of how as recently as 2005 the concept of corporate social responsibility (CSR) was completely new to the exchange executives. Despite its later start, Shanghai has already achieved more than many developed country markets, issuing guidance documents on CSR and environmental disclosure and mandating disclosure for companies in certain categories, for example, those with overseas listings. Also, Chinese State Owned Enterprises (SOEs) have their own set of reporting requirements, which should improve the generally poor transparency and resource utilisation target setting in most industries at present. The country’s regulator, the China Securities Regulatory Commission, has likewise made great strides in encouraging

reporting in the past couple of years. An open-source discussion paper, “Sustainable Stock Exchanges: Real Obstacles, Real Opportunities”, published for the event by Responsible Research and sponsored by Aviva Investors, summarised the status of sustainability initiatives at 30 of the world’s largest stock exchanges and includes some insightful responses directly from the exchanges concerning tailoring ESG integration strategies to fit ownership structures and levels of national development. Another section in the paper discusses the roles of various stakeholders in promoting and facilitating improved corporate sustainability practices by stock exchanges and their listed companies. It also offers suggestions for policy and structural changes for stock exchanges to more easily promote sustainability, such as separating the Operational Corporate Responsibly Committee from a broader Sustainability Committee, which looks more deeply at transparency of ESG risk amongst its listed vehicles. A welcome voice in the day’s debate included Jane Diplock, Chair of the International Organisation of Securities Commissions (IOSCO) who focused on the need for more research into the linkages between sustainability, systemic risk and short-termism and less reliance on intuition and anecdote going forward. Mervyn King, Chairman of the Global Reporting Initiative, put the emphasis squarely back on asset owners who, he felt, should be demanding a ‘report or explain’ mentality from the boards of companies they own. Throughout the event, most participants seemed to agree that asset management mandates would have to change to reflect the greater need for reporting on how ESG risks are integrated into investment decision-making. Moreover there was a shared call-to-action for a concerted push to support an eventual global standard for an integrated financial and non-financial reporting methodology, suchas has been successfully adopted in South Africa. There was a sense that, whilst mandatory reporting and an overhaul of listing rules is desirable in the long-term, a ‘hybrid’ approach could be very successful in the short term. Key areas for stock exchanges to focus on were setting voluntary guidelines, arranging corporate sustainability training, encouraging sustainable financial accounting modules in the CFA and other financial analysis courses, promoting the development of improved ESG research and creating ‘ESG indices’ to enable institutional investors to allocate capital more sustainably. Most stock exchanges, even those that are privately owned and motivated by profit, seem to agree on a gradual move towards improved sustainability reporting, although their focus currently is mainly on improved governance reporting. The concern of most exchanges is that onerous environmental and social reporting requirements could result in inefficiency, with companies producing hundreds of additional pages that could go unread by many investors. As the Secretary-General of UNCTAD, Supachai Panitchpakdi, highlighted in his address, “Stock exchanges and regulators have an important role to play by promoting standardized, transparent ESG disclosure, and empowering investors through corporate governance rules to make use of that information”. Participants seemed to agree that exchanges have a vital part to play in guiding companies towards the acknowledgement, measurement and communication on ESG risks to future earnings, and in providing a platform to distribute that information to responsible investors. This is reflected in the words of Steve Waygood, head of sustainability at Aviva Investors, as quoted by the FT last week, “Stock exchanges should take more responsibility for the companies they list. They owe it to investors.”

Lucy Carmody is Executive Director at Responsible Research
Link to report on Sustainable Stock Exchanges