How Far Will Exchanges Push ESG Reporting?

While more emerging-markets exchanges require companies to report on environmental, social and governance policies, Nasdaq is seeking consensus before it acts. But so far, there’s more talk than action.


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 exchange’s 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.


Steve Waygood, 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 collective-bargaining agreements.

“We’re trying to make everything associated with the management of our company conform to our sustainability standards,” explains Frucher. “You can’t 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 hasn’t 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 country’s 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: “It’s 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 global issue.”

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 business.

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 don’t want to have that kind of arbitrage. Listing is a global issue. It’s a competitive, global business.”

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. “‘We’re willing to work with you. But you have to show a market interest in this because, guess what? these are markets. Words are cheap. It’s 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 World’s 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 billion.

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 much impact.

When asked about the initiative’s 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 don’t 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.