The Nasdaq OMX Group is lending its voice to the growing
debate over the role of exchanges in requiring listed companies
to disclose their performance on ESG issues, as environmental,
social and governance matters are called. Nasdaq, however, is
seeking to promote ESG reporting standards for listed companies
without putting forth actual requirements, and some observers
say that amounts to more talk than action.
Meyer Sandy Frucher, vice chairman of Nasdaq OMX
Group in New York, says the exchanges approach of seeking
coordinated action among exchanges will prove more effective
than exchanges adopting reporting standards on their own. But
Nasdaq has neither defined which sustainability factors it
thinks are the most important for its listed corporations, nor
provided details on current discussions with other exchanges.
It does, however, support the reporting standards for companies
set out by the Amsterdam-based non-profit organization the
Global Reporting Initiative (GRI). Under these standards,
companies report key indicators of their performance on
economic, environmental and social issues, with the last broken
down into the subcategories of labor, human rights, society and
product responsibility. This year the exchange also plans to
host one conference a quarter on the topic.
Aviva Investors head of sustainable research and
engagement in London, believes more aggressive action is
necessary. Waygood says emerging-markets exchanges have taken
the lead on the issue. BM&FBovespa, Johannesburg Stock
Exchange and the Istanbul Stock Exchange are signatories to the
United Nations Principles for Responsible Investment, an
initiative that began in 2006 to encourage institutional
investors to embrace ESG, while the other major exchanges are
not. Many emerging-markets exchanges also provide
sustainability guidance for their listed companies.
BM&FBovespa has taken matters a step further. In 2012 the
Brazilian exchange began required each listed company to either
provide a sustainability report or explain why it does not.
South Africa, India and Hong Kong are also incorporating
sustainability into their listing rules. In many ways,
these emerging markets are running ahead of the
developed-country exchanges on this agenda, says Waygood.
Although Aviva pushes for greater disclosure from companies it
invests in, Waygood believes it necessary for regulators to
mandate greater disclosure. We consider that the
significant gap in corporate disclosure of sustainability
information is a market failure that requires government
intervention to correct, he says.
Frucher insists Nasdaq remains committed to ESG issues. To
encourage broader change, it has adopted ESG reporting for its
own operations. At the end of last year, Nasdaq OMX published
its first sustainability report based on GRI reporting
standards, and it was issued as a separate report rather than
an integrated one, which is combined with financial
statements. In that sustainability report, Nasdaq OMX said it
is purchasing renewable energy from wind turbine farms, and its
offices are being remodeled to LEED specifications. It also
reported on key indicators such as direct energy consumption by
its primary energy source and the benefits it provides to
full-time, permanent employees and to employees covered by
Were trying to make everything associated with
the management of our company conform to our sustainability
standards, explains Frucher. You cant ask
people to follow you unless you are the example.
Nasdaq also continues to offer its own sustainability index
even though, as Frucher admits, trading hasnt started
because there are no products tied to it yet, though the index
has been outperforming the Dow Jones Industrial Average,
S&P 500 and the Nasdaq Composite indexes during the past
six months. Launched in June 2009 by Nasdaq OMX and CRD
Analytics, the Nasdaq OMX CRD Global Sustainability index
currently tracks 100 companies that Nasdaq and CRD judge to do
the best job of meeting the GRI reporting standards on such
issues as carbon footprint, energy usage, water consumption,
hazardous and nonhazardous waste, employee safety, workforce
diversity, management composition and community investing.
Unlike a handful of other exchanges, Nasdaq does not require
its listed companies to provide ESG reporting.
Instead, Nasdaq has formed a coalition of exchanges to
advance the issue at the Paris-based trade body, the World
Federation of Exchanges (WFE), and eventually with regulators.
After Rio+20, the United Nations Conference on Sustainable
Development that was held in Brazil in June, Nasdaq teamed up
with the host countrys BM&FBovespa, as well as the
Johannesburg and Istanbul exchanges and the Egyptian Exchange
in Cairo to push the ESG agenda.
But the exchanges have yet to agree on what would constitute
a set of minimum reporting standards. The ESG rules that
may or may not be part of global regulations are still
TBD, says a Nasdaq spokesman, noting the question
requires a huge amount of negotiation, and there is not
exchange-level consensus yet. We are working through the WFE to
reach exactly that kind of understanding.
Says Frucher, who is a board member of the WFE:
Its very difficult for an exchange, whether it is
us or any other exchange, to set unilateral mandates in this
regard, and so we decided we would try to form broad-based
coalitions with other exchanges and try to move other exchanges
into recognizing the importance of this globally; this is a
Nasdaq, BM&FBovespa and other coalition members were
able to change the agenda at the latest WFE General Assembly
meeting in October to include a panel on ESG issues, and the
WFE has agreed to move forward on the issue with another panel
next October. But coordinated action seems illusive. Some large
exchanges are still wary of global competition and how
additional reporting might negatively affect their
For that reason, Frucher emphasizes the need for global
coordination. Otherwise, what you get is certain kinds of
companies would avoid involvement, and they would go listing
shopping; and you dont want to have that kind of
arbitrage. Listing is a global issue. Its a competitive,
But Frucher also says based on trading activity few
investors appear ready or willing to invest in companies or
indexes solely because of their sustainability. Many exchanges
are offering sustainability indexes without much fanfare. As
mentioned earlier, trading on Nasdaq OMX CRD Global
Sustainability index is nonexistent.
Furthermore, Frucher adds, most institutional investors have
not integrated ESG factors into their portfolio-selection
processes across asset classes. He says screening of companies
based on sustainability factors is also limited; reporting
returns based on ESG investments is even more so.
What we are saying to these investor groups who have a
true, honest interest in these things is, Hey, you have
to prove that there is cachet behind being a sustainable
company and are willing to put your numbers out
there, says Frucher. Were willing
to work with you. But you have to show a market interest in
this because, guess what? these are markets. Words are cheap.
Its what you do.
Aviva Investors Waygood says it will take regulatory
action to bring about such change. A group of indexes
does not deal with the problem, he says. We are far
more interested in the listing rules for the main exchanges
than in the various sustainability indexes that have been
developed. These indexes do have an important role to play and
can certainly help improve the corporate information,
Waygood explains. However they are not the main market
and can distract exchanges from the strategic challenge of
improving the quality of information disclosure
marketwide, he continues.
Earlier this year Aviva commissioned Corporate Knights, a
Canadian media and research firm focused on ESG reporting, to
determine which stock exchanges had the most companies
reporting on ESG issues. The results showed wide variances in
what global corporations are reporting as well as in reporting
standards at various exchanges.
In its June report, Benchmarking the Worlds
Composite Stock Exchanges, Corporate Knights head
of research, Doug Morrow, found some surprising results.
First, the seven most commonly reported sustainability
factors identified by Corporate Knights payroll,
greenhouse gases, energy, waste, water use, lost-time injury
rate and employee turnover were disclosed by only 10
percent of businesses with a market cap of at least $2
Second, after ranking the exchanges on those indicators, the
report found that the Helsinki Stock Exchange, owned by Nasdaq
OMX, had the greatest proportion of listed companies engaged in
sustainability reporting in four out of the seven categories:
payroll, greenhouse gases, energy and waste. Italy had the
highest disclosure rate for employee turnover, Portugal for
water use and Denmark for lost-time injury rate.
Morrow argues that if exchanges do not know what
sustainability factors they should encourage companies to
report on, then they should just start with the seven most
common found in the report.
On this point, its hard to see how the UN Global Compact, an
initiative aimed at encouraging companies to adopt sustainable
and socially responsible policies, with its signatories
representing $30 trillion in assets under management, has had
When asked about the initiatives impact, Frucher
responded: Those investors who are in the forefront of
articulating these concerns have to support it by where they
place their investments. We dont do that. We provide them
a forum, meaning a market, to do it, and we provide them with
products to do it.
Frucher hopes that the WFE will have a document ready on
minimum reporting requirements for the International
Organization of Securities Commissions and global regulators to
review next year.