The Key To Improving Corporate Disclosure? Stock Exchanges
The phrase “ESG disclosure” was on the lips of hundreds of investors at the annual Principles for Responsible Investment (PRI) conference in London today. And there’s a reason why the much-debated corporate disclosure gap on global sustainability challenges was center-stage: today, the United Nations released long-awaited Model Guidance on ESG Reporting for use by global stock exchanges.
After many years of working in this space, it feels like we may finally be reaching a tipping point when it comes to robust, consistent environmental, social and governance (ESG) reporting by all listed companies globally – a key step in marshaling concrete action to build a sustainable economy. Here’s why.
First, the UN Model Guidance will assist stock exchanges in developing broad, voluntary reporting expectations for listed companies on key sustainability issues such as pollution, climate change adaptation, water use and workplace conditions.
This is critical because stock exchanges facilitate the information flow between investors and companies. If the information that investors receive is shallow or non-existent, then the investment decisions they make are also likely to be flawed. An investor – like your pension fund or 401k provider, perhaps – cannot reduce its exposure to climate risks when the majority of companies in all sectors do not report ESG data, such as their carbon emissions.
Secondly, stock exchanges hold the key to change. After all, they are the entry point for all of the largest publicly traded companies in the world. Working together, exchanges can ensure that investors have the consistent, comparable and high quality information on how public companies are positioning themselves on local and global sustainability challenges.
Indeed, the UN’s Model Guidance, and the collaborative efforts of investors, Ceres, PRI and other disclosure advocates, have the potential to trigger historic improvements in how global financial markets behave.
But when it comes to the Model Guidance, there’s a catch: it does not advocate a specific reporting framework, and by its nature, suggests that the exercise should be voluntary.
Investors have made it clear that if they are to compare ‘apples to apples’ on ESG metrics such as company safety records or resource use – just as they do with a financial measure such as P&L (Profit and Losses) – then they need more consistent rules and structures across global markets. Over the last 25 years of Ceres advocating for sustainability reporting by companies, we’ve also seen time and again that voluntary disclosure measures tend to lead only to select large companies reporting on these issues.
Investors feel the same way. According to the respected CFA Institute (a global association of investment professionals), 61 percent of investors agree that public companies should be required to report at least annually on sustainability indicators. “Although I am a supporter of market forces and lean regulation, it’s clear that regulation in this particular area leads to more disclosure than voluntary mechanisms,” Mark Wilson, Group CEO of Aviva Investors, said recently. Investment giant BlackRock agrees with Wilson, and has publicly advocated for stock exchanges to better collaborate to produce globally-consistent, mandatory standards on ESG reporting.
This is why Ceres organized a working group of investors in late 2010 focused on stock exchange engagement. The effort brought together large U.S. pension funds, BlackRock and other U.S. and international asset managers, to eventually develop the Investor Listing Standards Proposal – which outlined investor views on mandatory reporting on ESG issues through stock exchange listing requirements. This work, and additional investor engagement, also catalyzed the World Federation of Exchanges to create a Sustainability Working Group to make recommendations to their member exchanges on sustainability reporting expectations.
It’s no coincidence that from Australia to Amsterdam, the 10 stock exchanges ranked as best in the world at encouraging the release of sustainability information are all located in jurisdictions with mandatory disclosure policies. Most of the exchanges are in Europe; none of the U.S. exchanges made the leader list.
Investors will continue to push for mandatory reporting, but my hope is that the UN Model Guidance will serve as ‘training wheels’ for exchanges around the globe – helping them test approaches and put new sustainability reporting standards in place which can then be enhanced to get stronger, more consistent ESG reporting by all companies – large and small.
Until we get to that point, corporate disclosure will be weak and investors will be operating with one arm tied behind their backs in evaluating companies’ performance on critical sustainability risks. And that won’t be good for anyone, least of all the planet – which desperately needs stronger capital market action on climate change and other colossal sustainability threats.